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Securities and Exchange Commission
Washington, D.C. 20549



|FORM 20-F                                                                                 
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|Commission
    file number: 82-1-14744                                                    
|                                                                                          
|                                                                                          
|United
            Utilities PLC(Exact
    name of Registrant as specified in its charter)
|                                                                                          
|                                                                                          
|England(Jurisdiction
    of incorporation or organisation)                                
|                                                                                          
|                                                                                          
|Dawson
    House, Great Sankey, Warrington, WA5 3LW, England                              
|(Address
    of principal executive offices)                                              
|                                                                                          

Securities registered or to be registered pursuant to Section 12 (b) of the Act:

|                                                    |  |                                          
|--------------------------------------------------- |  | -----------------------------------------
|Title of each class                                 |  | Name of each exchange on which registered
|                                                    |  |                                          
|American Depositary Shares each of which represents |  | New York Stock Exchange                  
|2 Ordinary shares                                   |  |                                          
|                                                    |  |                                          
|Ordinary
    shares of £1 each                      |  | New York Stock Exchange*                 

*Not for trading, but only in connection with the registration of American Depositary Shares representing such Ordinary shares, pursuant to the requirements of the Securities and Exchange
Commission.

Securities registered or to be registered pursuant to Section 12(g) of the Act: None.

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None.

Indicate the number of outstanding shares
of each of the issuers classes of capital or common stock as of the close
of the period covered by the Annual Report.

Ordinary shares of £1 each: •• • (as
of 31 March 2006). A shares of £0.50
each:• • •(as
of 31 March 2006).

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

|Yes                                                                                                       |  | No     
|--------------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                          |  |        
|Indicate
          by check mark which financial statement item the Registrant has elected
    to follow.
|                                                                                                          |  |        
|Item
          17                                                                                         |  | Item 18



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| | Annual
      Report & Accounts and
| | ----------------------------------
| | Form
      20-F 2006              
| |                                   











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| |                                                                                     |  |           |  |           | 
| | ----------------------------------------------------------------------------------- |  | --------- |  | --------- | 
| |                                                                                     |  |           |  |           | 
| | Key
      performance indicators                                                    | 
| |                                                                                    
| |                                                                                     |  |           |  |           | 
| |                                                                                     |  |           |  |           | 
| |                                                                                     |  |           |  |           | 
| |                                                                                     |  |           |  |           | 
| |                                                                                     |  |           |  |           | 
| | Continuing
      operations                                                         |  | 2005/06   |  | 2004/05   | 
| |                                                                                     |  |           |  |           | 
| | Revenue                                                                             |  | £2,386.8m |  | £2,103.7m | 
| |                                                                                     |  |           |  |           | 
| | Operating
      profit before restructuring costs(1)                                |  | £765.5m   |  | £681.1m   | 
| |                                                                                     |  |           |  |           | 
| | Operating
      profit                                                              |  | £740.0m   |  | £651.4m   | 
| |                                                                                     |  |           |  |           | 
| | Profit
      before taxation before restructuring costs and the impact of IAS 39(2) |  | £480.5m   |  | £397.3m   | 
| |                                                                                     |  |           |  |           | 
| | Profit
      before taxation                                                        |  | £439.3m   |  | £367.6m   | 
| |                                                                                     |  |           |  |           | 
| | Basic
      earnings per share  continuing(3)                                      |  | 37.3p     |  | 34.5p     | 
| |                                                                                     |  |           |  |           | 
| | Dividend
      per ordinary share                                                   |  | 43.87p    |  | 45.42p    | 
| |                                                                                     |  |           |  |           | 
| | Re-presented
      dividend per ordinary share post rights issue(4)                 |  | 43.87p    |  | 42.43p    | 
| |                                                                                     |  |           |  |           | 
| | Borrowings
      net of cash and short-term deposits                                |  | £4,186.7m |  | £4,278.6m | 
| |                                                                                     |  |           |  |           | 
| | Shareholders
      equity                                                          |  | £2,629.2m |  | £2,143.1m | 
| |                                                                                     |  |           |  |           | 
| | Gearing(5)                                                                          |  | 61%       |  | 67%       | 
| |                                                                                     |  |           |  |           | 
| | Interest
      cover(6)                                                             |  | 2.7       |  | 2.4       | 
| |                                                                                     |  |           |  |           | 
| | Dividend
      cover(7)                                                             |  | 0.9       |  | 0.9       | 
| |                                                                                     |  |           |  |           | 
| | Electricity
       average minutes for which customers were without supply(8)      |  | 47.5      |  | 51.5      | 
| |                                                                                     |  |           |  |           | 
| | Water
      quality  mean zonal compliance(9)                                      |  | 99.94%    |  | 99.92%    | 
| |                                                                                     |  |           |  |           | 
| | Safety
       accident incident rate(10)                                           |  | 548       |  | 570       | 
| |                                                                                     |  |           |  |           | 
| | Average
      number of employees worldwide (full-time equivalents)                 |  | 17,029    |  | 15,935    | 
| |                                                                                     |  |           |  |           | 

| | (1)  | Operating
      profit from continuing operations before restructuring costs is reconciled
      to operating profit from continuing operations on page 16.                                                                                                                                                                                                                                                  
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2)  | Profit
      before taxation from continuing operations before restructuring costs and
      the impact of IAS 39 Financial Instruments: Recognition Measurement
      is reconciled to profit before taxation from continuing operations on page
      16.                                                                                                                                                
| | (3)  | Prior
      period earnings per share has been re-presented for comparative purposes
      to reflect the bonus element of the second stage of the rights issue on
      the weighted average number of shares.                                                                                                                                                                                              
| | (4)  | Dividend
      per ordinary share for the year ended 31 March 2005 has been re-presented
      for comparative purposes to take account of the bonus element of the rights
      issue.                                                                                                                                                                                                                      
| | (5)  | Gearing
      is measured as borrowings net of cash and short-term deposits divided by
      total capital employed. Total capital employed is shareholders equity
      plus borrowings net of cash and short-term deposits.                                                                                                                                                                               
| | (6)  | Interest
      cover is the number of times the net finance expense before the impact of
      IAS 39 is covered by operating profit from continuing operations before
      restructuring costs and the impact of IAS 39.                                                                                                                                                                                   
| | (7)  | Dividend
      cover is calculated by dividing profit for the year from continuing operations
      before restructuring costs and the impact of IAS 39, by the dividend charge
      relating to the period.                                                                                                                                                                                                
| | (8)  | The
      minutes of supply lost per customer is an Ofgem measure calculated by taking
      the sum of the customer minutes lost for all restoration stages for all
      incidents and dividing by the number of connected customers as at 30 September
      each year. The 2006 figure has still to be audited by Ofgem. The 2005 figure
      excludes an exceptional storm experienced in January 2005.
| | (9)  | Mean
      zonal compliance is a measure introduced by the Drinking Water Inspectorate
      in 2004. It is the average of the zonal percentage compliances of every
      one of a water companys zones. Figures stated are for the calendar
      years to December 2005 and December 2004.                                                                                                               
| | (10) | The
      accident incident rate is the number of lost time accidents in the year
      pro-rated to produce a rate per 100,000 employees.                                                                                                                                                                                                                                                                   
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| |      |                                                                                                                                                                                                                                                                                                                                                                                                              
| |      |                                                                                                                                                                                                                                                                                                                                                                                                              

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| | United
    Utilities plc  Annual report and accounts and Form 20-F 2006                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| | In
      this report, references to company or United Utilities
      are to United Utilities PLC, either alone or together with its consolidated
      subsidiaries, as the context requires. References to group are
      to United Utilities PLC together with its consolidated subsidiaries. References
      to United Utilities Electricity are to United Utilities Electricity
      PLC, to United Utilities Contract Solutions are to United Utilities
      Contract Solutions Holdings Limited and subsidiaries, to United Utilities
      Industrial are to United Utilities Industrial Limited and subsidiaries,
      to United Utilities Networks are to United Utilities Networks
      Limited and, up until 31 March 2003, the metering and connections activities
      of United Utilities Water and United Utilities Electricity, to United
      Utilities Customer Sales are to United Utilities Customer Sales Limited
      and the customer relationship activities of United Utilities Water, to United
      Utilities North West are to United Utilities North West PLC and to
      the asset management activities of the wastewater, water and electricity
      network assets owned by United Utilities Water and United Utilities Electricity,
      to United Utilities Water are to United Utilities Water PLC,
      to Vertex are to Vertex Data Science Limited and to Marlborough
      Stirling are to Vertex Financial Services Holdings Limited (formerly Marlborough
      Stirling plc) and subsidiaries and to 1st Software are to 1st Software Group
      Limited and subsidiaries which are all wholly owned subsidiaries of the
      company. References to Your Communications are to Your Communications
      Group Limited and subsidiaries, to Eurocall are to Eurocall
      Holdings Limited and subsidiaries which companies were sold to THUS Group
      PLC on 26th February 2006. | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| | References
      are also made to specific terms which bear the following meanings:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| | 
      Megawatt (MW)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| | 
      Gigawatt (GW)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| | 
      Gigawatt-hour (GWh)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| | 
      Kilowatt (kW)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| | 
      Kilovolt (kV)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| | 
      Megalitre (Ml)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| | 
      Microgram (ug)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| | The
      companys registered office is located at Dawson House, Great Sankey,
      Warrington, WA5 3LW, England and its telephone number is +44 (0)1925 237000.
      The company is registered in England number 2366616.The web site address
      is www.unitedutilities.com.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| | The
      companys financial year ends on 31 March of each year. Unless the
      context otherwise requires, references in this report to financial
      year or to a particular year (e.g. 2005/06) are to the 12 months ended
      on 31 March of that year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| | This
      is the report and accounts and Form 20-F of United Utilities PLC for the
      financial year ended 31 March 2006. It contains the annual report and accounts
      in accordance with International Financial Reporting Standards as adopted
      for use in the European Union and a reconciliation to US generally accepted
      accounting principles. This document also incorporates the annual report
      on Form 20-F as required by the US Securities and Exchange Commission (the
      SEC), however the document filed with the SEC may be supplemented
      with further information or amended if necessary.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 

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|                                   |  |  | 
|---------------------------------- |  |  | 
|Cross
      reference to Form 20-F |  |  | 
|                                   |  |  | 



The information
  in this document that is referred to below shall be deemed to be part of the
  annual report on Form 20-F for 2006 that has been filed with the Securities
  and Exchange Commission. This information is the only information that is intended
  to be filed or incorporated by reference into any filing made by the company
  under applicable US securities laws.

PagesItem
          1  Identity of directors, senior management and advisersNot
        applicable
      Item
          2  Offer statistics and expected timetableNot
        applicable
    Item
          3  Key informationSelected
        consolidated financial data
    115-117Risk
        factors
    32-34Item
          4  Information on the company
    4-15History
        and development of the company
    4Business
        overview
    5-15Organisational
        structure
    5Property,
        plant and equipment
    14-15Item
          5  Operating and financial review
          and
          prospects
    2,
          16-29Executive
        overview
    2-3Operating
        and financial performance review
    16-29Liquidity
        and capital resources
    23-27Research
        and development, patents and licences
    29Off-balance
        sheet arrangements
    25Contractual
        obligations
    25-26Safe
        harbor
    32Item
          6  Directors, senior management and employeesDirectors
        and senior management
    35-37Compensation
    41-55Non-executive
        directors terms of appointment
    41-42Executive
        directors contracts of service
    54-55Remuneration
        committee
    42Audit
        committee
    60Employees
    38Directors share
        interests
    38-39Employee
        involvement and employee share schemes
    41Item
          7  Major shareowners and related party transactionsMajor
        shareowners
    39Related
        party transactions
    102Item
          8  Financial information (see item 17)Differences
        in UK/NYSE corporate governance practices
    61Dividends
    118Litigation
    34Significant
        changes
    18Item
          9  The offer and listingHistory
        of stock price
    124Markets
    4


PagesItem
        10  Additional informationMemorandum
        and articles of association
      120-122Material
        contracts
      119-120Exchange
        controls
      119Taxation
      122-123Documents
        on display
      124Subsidiary
        information
      86Item
        11  Quantitative and qualitative disclosure
        about market risk
      24-26Item
        12  Description of securities other than equity securitiesNone
      Item
        13  Defaults, dividend arrearages and delinquenciesNone
      Item
        14  Material modifications to the rights of security holders and
        the use of proceedsNone
      Item
        15  Controls and procedures
      59-60Item
        16  [Reserved]
      Item
        16A  Audit committee financial expert
      60Item
        16B  Code of ethics
      30Item
        16C  Principal accountant fees and services
      61Item
        16D  Exemption from listing standardsfor
        audit committeeNot
        applicable
      Item
        16 E  Purchases of equity securities by the issuer and affiliated
        purchasersNot
        applicable
      Item
        17  Financial statementsReport
        of independent registered public accounting firm
      Filed
        with SEC on Form 20-FConsolidated
        income statement
      64Balance
        sheets
      65Cashflow
        statements
      67Statements
        of recognised income and expense
      66Notes
        to the financial statements
      75-108Summary
        of differences between International Financial
        Reporting Standards and accounting principles accepted
        in the United States of America
      109-114Item
        18  Financial statementsNot
        applicable
      Item
        19  ExhibitsFiled
        with SEC on Form 20-F
      




|United
      Utilities Annual Report & Accounts 2006 | 1
|---------------------------------------------------- | -

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Back to Contents

| |                       | 
| | --------------------- | 
| | Chairman's review     | 
| |                       | 
| |                       | 
|
| | Chairmans
    review | 

| |  |                                                                                                                  
| |  | -----------------------------------------------------------------------------------------------------------------
| |  | We
        are committed to listening
        and responding to the needs
        of our different stakeholders
| |  |                                                                                                                  



PeopleThe
    people in United Utilities drive its performance and the first thing I would
    like to do is thank all our employees for their continuing commitment and
    hard work. We
    are pleased to welcome Philip Green who took over from John Roberts as chief
    executive officer on 31 March 2006. Philip joins us from Royal P&O Nedlloyd
    and brings with him an impressive management record, having led highly competitive,
    customer-focused, international service companies. Philips renewed focus
    on leadership and delivery takes the company into a new phase in its development. We
    are also pleased to welcome Tim Weller who replaces Simon Batey as chief financial
    officer in August this year. Tim has extensive experience in the utilities
    sector, most recently as group finance director at RWE Thames Water. John
    Roberts and Simon Batey have made substantial contributions to the group over
    the last seven years, and I thank them on behalf of the board. We also thank
    Jane Newell who will retire at the annual general meeting after nine years
    as a non-executive director and welcome Paul Heiden as a non-executive director. PerformanceThe
    board is pleased to report another good set of financial results. Revenue
    from continuing operations rose 13.5 per cent to £2,386.8 million, reflecting
    growth across all businesses. Operating profit from continuing operations
    before restructuring costs* increased to £765.5 million, up 12.4 per
    cent on last year. We
    are proposing to increase the dividend for the year ended 31 March 2006 to
    43.87 pence per ordinary share. The final dividend of 29.58 pence will be
    paid to shareholders on 25 August 2006. Looking
    beyond the financial bottom-line, the board has been pleased with progress
    on important areas such as customer service and leakage, and continued support
    for community programmes. StrategyUnited
    Utilities maintains its strategic focus to improve efficiency in United Utilities
    North West and grow its support services businesses, Contract
    Solutions and Vertex. Our
      target up until 2010 remains to grow the dividend in line with inflation,
      subject to United Utilities North West at least meeting its cost savings
      targets,
    and continuing profitability in Contract
    Solutions and Vertex. I believe we
    are on track to achieve both objectives.


In line
    with our strategy, we sold the Your Communications business to THUS Group
    plc in February 2006. We retain a 21.7 per cent stake in the enlarged THUS
    Group. Stakeholder engagementWe
    are committed to listening and responding to the needs of our different stakeholders.
    Earlier this year, I chaired one of eight discussion groups. Stakeholders
    told us what they thought the most important issues were for the company.
    In this report the company talks about stakeholders areas of interest
    and what it is doing to address any concerns. We
      are grateful that so many readers of last years stakeholder report
       took the time to complete our feedback questionnaire. Most thought that
      our
    approach to reporting was good. Some thought the report too long: in response
       we have reduced its size, and will make more information available on
      our
    website www.unitedutilities.com. We
    hope that you will continue to share in the success of our company. We are
    confident that United Utilities will continue to meet its business objectives.  Dick
    EvansChairman




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| |  | Chief
    executive officer's review
| |  |                                     

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|                                         
|Chief
         executive officers review
|                                         
|                                         
|                                         





I joined
      United Utilities only recently, but several things are already clear to me.
      Few companies provide services as essential to peoples everyday lives,
      or make such a contribution to improving our environment. We have many committed
      and talented people within the company. In my first few months, I have been
      impressed by their passion, dedication and expertise. Research shows that
      United Utilities is a respected,
  credible and trustworthy company and everyone involved in reaching this position
      deserves great credit. Our
    market position is strong and we are well placed to build on our current success.
    Later in this summary, we list some of our recent successes. We also address
    what more we can do. For example, I want to see our performance in running
    our own business in the north west match our success in operating other peoples
    businesses. Our customer service, in particular, can improve further. My
    passion in business centres on leading change to provide great service 
    an essential element in creating a high performance company. Sharpening our
    focus on operational excellence and customer service will ensure we respond
    to two of the most important issues for United Utilities and our stakeholders. StakeholdersEmployees,
     customers and investors should head the stakeholder list of almost every
    commercial
    organisation. We add our regulators and our commercial partners. Understanding
     their requirements and then managing and reporting our performance is central

    to how we run our business. For me, the cornerstone of this approach is our
     employees. Thats why Ive been travelling around United Utilities
    to see what we do, how we do it and to meet our people face-to-face. I have
    seen key water, wastewater and electricity sites in north west England,
    and visited major operations across the UK. In my first year, I want to reach
    80 per cent of our 18,000 employees. Business performanceIve
    seen the progress that our businesses are making. United Utilities North West
    has out-performed the price controls set in 1999 and is on track to out-perform
    the 2004 price controls. It has a clear strategy and a strong focus on performance. Contract
      Solutions has a large order book and good growth potential. Its contract
      with
    Dwr Cymru Welsh Water has already cut the controllable cost base by 25 per
      cent, and performance has gone from near the bottom of Ofwats
    overall performance assessment to the top. Vertex
    has been building its Financial Services division, and its latest contract
    win with Deutsche Bank is evidence of the companys growing stature in
    that market.


LeadershipThe
    right leadership is vital. In United Utilities there is more to be done to
    ensure leadership is embedded and that everyone understands their contribution
    and how this impacts on performance. That is why my priority over the first
    few months will be to develop a clear and compelling vision for the company,
    which will inspire our people. The
    company is performing well but there is more to be done in terms of delivering
    the truly excellent service that will help to make us a great business. ResponsibilityI
    am aware that we leave a big environmental footprint, not least through the
    energy and raw materials we consume. We have made progress in understanding
    our social and environmental impacts and taken steps to manage them. Judging
    by external benchmarks, United Utilities is one of the UKs leading companies
    in the way it works with its local communities and I look forward to building
    on this position. The futureWe
    are a major FTSE 100 company and are well placed to build on our current successes.
    Im looking forward to the next phase of the companys development,
    working with the board, the leadership team and employees. Its an exciting
    time to be leading this organisation.  Philip
    GreenChief
     executive officer




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|Business
        description |  |  | Operating
        and financial review
|                             |  |  |                                       







Capital
          investment in water and electricity
      in north west England (2005/06)£582.2m(2004/05: £858.7m)


UNITED
    UTILITIES PLC United
  Utilities PLC is a public limited company registered in England and Wales.
  Its multi-utility operations, comprising United Utilities Water PLC and United
  Utilities Electricity PLC, provide wastewater and water services and electricity
  distribution services, respectively, to a population of some seven million
  people in north west England. The groups infrastructure management business, United Utilities
Contract Solutions, applies the groups infrastructure management expertise to competitive markets and is now the leading utility outsourcing business in the United Kingdom. Vertex is one of the United Kingdoms largest providers of
business process outsourcing, managing, and often transforming, the processes which support a clients
business. United Utilities strategy
is to: 
   out-perform its new regulatory contracts (effective 1 April 2005) pursuant to which the group operates the wastewater, water and electricity distribution
networks; and
   grow its two support services businesses, United Utilities Contract Solutions and Vertex, by applying its core skills of infrastructure management and business
process management in the provision of these services to others. Through the expansion of these support services businesses, both organically


and
        through acquisition, the businesses now operate in overseas markets including
        central and eastern Europe, the Philippines, the United States of America,
      Canada and Australia. United Utilities PLC was incorporated on 1 April 1989 under the Companies Act 1985 along with its subsidiary United Utilities Water PLC. In November 1995, the company acquired
United Utilities Electricity PLC (then known as NORWEB plc), the distributor of electricity in north west England, and at that time supplier of electricity and gas in the United Kingdom, to form a multi-utility group. In August 2000, the company
sold the electricity and gas supply business and, as a result, no longer has any significant exposure to the competitive generation and energy supply market. On 26 February 2006, the company disposed of its telecommunications business, Your
Communications, to THUS Group plc. United Utilities
PLCs shares are listed on the London Stock Exchange and, in the form of
ADSs, on the New York Stock Exchange. Its registered office is at Dawson House,
Great Sankey, Warrington, Cheshire, WA5 3LW, England. The telephone number is
+44 (0) 1925 237000. Organisational structureA list of all principal operating subsidiary undertakings is contained in note 13 to the consolidated financial statements on page 86.


Table 1: Business overview

|                                   | Revenue |  | Segmental operating profit* |  | Segment assets | 
|---------------------------------- | ------- |  | --------------------------- |  | -------------- | 
|                                   |         |  |                             |  |                | 
|                                   |         |  | per cent of                 |  |                | 
|Financial year ended 31 March 2006 | £m      |  | group                       |  | £m             | 
|                                   |         |  |                             |  |                | 
|Licensed multi-utility operations  | 1,502.9 |  | 57.8                        |  | 652.3          | 
|                                   |         |  |                             |  |                | 

Licensed multi-utility operations comprise the regulated monopoly activities of United Utilities Water (wastewater and water) and United Utilities Electricity (electricity
distribution). These companies own the respective infrastructure network assets representing around 83 per cent of the groups total assets at 31 March 2006. The businesses are capital intensive and are subject to economic, quality and
environmental regulation. These businesses generate 84 per cent of the groups operating profit from continuing operations*, of which approximately three quarters is derived from wastewater and water and approximately one quarter from
electricity distribution.

|Infrastructure management | 692.3 |  | 26.6 |  | 95.5 |  | 12.3 |  | 701.9 |  | 6.2 | 
|------------------------- | ----- |  | ---- |  | ---- |  | ---- |  | ----- |  | --- | 
|                          |       |  |      |  |      |  |      |  |       |  |     | 
|

United Utilities Contract Solutions applies the groups infrastructure management expertise to other competitive markets by providing a service to clients in managing their
infrastructure assets. In addition, it owns the groups interest in non-regulated utility assets. These activities employ only a limited amount of capital, representing six per cent of the groups total assets at 31 March 2006.

|Business process outsourcing | 404.7 |  | 15.6 |  | 20.8 |  | 2.7 |  | 321.1 |  | 2.8 | 
|---------------------------- | ----- |  | ---- |  | ---- |  | --- |  | ----- |  | --- | 
|                             |       |  |      |  |      |  |     |  |       |  |     | 
|

Vertex is a leading provider of business process outsourcing and technology services. These activities employ only a limited amount of capital, representing three per cent of the
groups total assets at 31 March 2006.

|Note:Financial
      data for the year ended 31 March 2006 has been extracted from note 1 of
      the consolidated financial statements, using the definitions set out therein.
      Revenue and percentage of group revenue from continuing operations are
    stated before intra-group eliminations.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*                                                                                                                                                                                                                                                                                                        



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Spot
    leakage as at 31 March 2006470Ml/d(31
    March 2005: 519 Ml/d)






---



BUSINESS
    OVERVIEW The group
    reports its results through three business segments which are licensed multi-utility
    operations, infrastructure management and business process outsourcing. References
    to segmental operating profit are defined as operating profit from continuing
    operations before restructuring costs and the amortisation of certain intangible
    assets for a segment as shown in note 1 of the consolidated financial statements.
    Operating profit from continuing operations before restructuring costs is
    reconciled in table 4 on page 16 to operating profit from continuing operations
as shown in the consolidated income statement. Licensed
      multi-utility operationsUnited
      Utilities North West manages the operation of the licensed wastewater and
      water treatment and network assets owned by United Utilities Water, and
      the electricity distribution assets owned by United Utilities Electricity,
      in north west England. These businesses deal with the removal and treatment
      of wastewater from, and the treatment and distribution of around 2.2 billion
      litres of water a day to, 3.1 million homes and businesses, and the annual
      distribution of approximately 25,500 GWh of electricity to 2.3 million
consumer premises. These activities are: 
   capital intensive  At privatisation in 1989, the wastewater and water infrastructure inherited by United Utilities Water was in need of substantial repair
and replacement. Further improvements have been required in order to comply with applicable UK and European Union environmental and drinking water quality regulations. Capital expenditure relating to wastewater and water in the financial year ended
31 March 2006 was £440.6 million (2005: £706.9 million) with 58.6 per cent to the water network, and 41.4 per cent to quality and efficiency. Capital expenditure for the financial year 2006 relating to electricity distribution was
£141.6 million (2005: £151.8 million). 39.0 per cent was load related (enabling new connections to be made to the network and increasing the amount of electricity able to be carried), 59.4 per cent was non-load related (for example,
replacing assets due to statutory obligations or replacing faulty or ageing equipment) and 1.6 per cent was non-operational (for example, information technology);
   subject to economic regulation  In general, these businesses are monopolies and are subject to incentive-based economic regulation which imposes caps on
increases in customer prices, rewards efficiency and high standards of customer service and penalises inefficiency and poor standards of customer service. The economic regulation of wastewater and water and the economic regulation of electricity
distribution are described in more detail below; and
   subject to environmental regulations  In the five-year period to31March 2005 the group spent £1.56 billion on environmental


improvements across
north west England. The projected expenditure over the next five years is £1.52
billion. During the financial
year ended 31 March 2006, the group made environmental improvements costing £184.1 million, including £67.9 million on improving standards for
wastewater and water treatment works, £32.7 million on improvements to sludge treatment and £43.5 million on controlling pollution from storm-water overflows (or unsatisfactory combined sewer overflows referred to by the Environment
Agency as Unsatisfactory Intermittent Discharges or UIDs). Key outputs
for water included the refurbishment of 800 kilometres of old water mains and
the replacement of some 833 lead communication pipes. Water meters were also
installed in 30,032 domestic properties under the free meter option scheme, whereby
customers can have a meter fitted free of charge and are given an opportunity
to switch to metered billing. Key outputs from the wastewater capital investment
programme
include works to address 43 unsatisfactory intermittent discharges (UIDs). The
environmental regulation of wastewater and water and the environmental regulation
of electricity distribution are described on pages 8 and 11 respectively. The group cannot
increase demand materially for its licensed multi-utility operations within its
licensed area and, as detailed below, the groups licensed multi-utility
businesses are restricted in their ability to increase prices. The principal
strategy for these businesses is to control costs and exploit the advantages
of owning and operating three utility networks with a largely common geography. Customers, billing and debt collectionUnited
Utilities North West places great importance on customer relations. It manages
the sales,
billing, cash collection and debt management activities and systems for 3.1 million
domestic and business customers in north west England and has responsibility
for improving the quality of service and the range of services provided to these
customers. United Utilities North Wests aim is continually to improve the
existing level of customer satisfaction, and to create value from its customer
relationships. As the Water Industry Act 1999 restricts the ability of a licensed
water utility to terminate services to domestic customers for non-payment, customer
relationship
management is an important activity. At present, United
Utilities North West supplies around 20.4 per cent (by volume) of the UK large-user
market (customers consuming more than 250 megalitres of water per annum). In
the competitive industrial market, its activities include on-site treatment of
wastewater and water at customers premises (together with United Utilities Contract Solutions), and advice on controlling leakage at customers premises
and on the recycling of water. It also has responsibility for managing ongoing
relationships with these customers and for growing the customer base.




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|Business
        description continued |  |  | Operating
        and financial review
|                                       |  |  |                                       



Wastewater collection, treatment and disposal operationsIn accordance with its licence, United Utilities Water is responsible for the collection, treatment and disposal of domestic wastewater, trade effluent (non-domestic wastewater)
and surface water in north west England. Surface water, mainly from groundwater infiltration and highway drainage, forms a major part of the wastewater which United Utilities Water must treat. In some cases, separate sewers are provided for foul
water and surface water, so that uncontaminated surface water may be piped directly to a watercourse. United Utilities
Waters wastewater treatment works provide a range of treatments. These
include primary, secondary and tertiary treatment involving a variety of physical,
chemical and biological processes. Treated liquid final effluent is discharged
into rivers, estuaries or via sea outfalls.A by-product of the treatment of wastewater is sewage sludge. Sewage sludge is also treated by a range of physical, chemical and biological processes. Currently, around
three-quarters of the end-product is recycled to agricultural land as a soil conditioner or used in land reclamation, and one-quarter is incinerated or disposed to landfill. However, due to the government designating over 55 per cent of England as
nitrate vulnerable zones (that is, zones that are subject to restrictions on the amount of nitrogen that can be applied to agricultural land), the amount of end-product that is recycled to agricultural land is likely to decrease quite significantly
in the short to medium term, while the amount of end-product that is incinerated is expected to increase. Water supply operations, treatment and distributionUnited Utilities Water obtains water from various sources including reservoirs, rivers and aquifers. The majority of its reservoirs are in the uplands of the Lake District and the
Pennine Hills, areas with a higher than average rainfall. Conversely, the major population centres it serves are in the lowlands of Greater Manchester, Lancashire and Cheshire. Merseyside, the other major population centre served by United Utilities
Water, receives its water supply principally from the River Dee and Lake Vyrnwy in north Wales. A large proportion of water supplied by United Utilities Water flows freely by gravity and does not need to be pumped. However, due to the nature of the
water catchments, being peaty moorlands or coal measure strata, enhanced treatment methods are required to ensure the water satisfies all regulatory and quality standards. All water supplied is treated in order to meet the appropriate standards enforced by the Drinking Water Inspectorate, the government regulator of drinking water in England and
Wales. The type of treatment varies from disinfection only, for some borehole sources, to more complex processes using coagulation, sedimentation, clarification and filtration and activated carbon adsorption for certain waters. United Utilities
Water monitors water quality by analysing samples regularly for both microbiological and chemical parameters. In the calendar year 2005, the business continued to improve quality, with the Drinking Water Inspectorate reporting that the company
achieved 99.94 per cent mean zonal compliance in the calendar year to December 2005 compared to 99.92 per cent the previous year. Treated water is delivered to the end customer through a network of large diameter trunk mains to smaller trunk mains, service reservoirs and water towers, and distribution mains.




Economic regulation of wastewater and waterThe
UK government
awarded Instruments of Appointment (licences) for the provision of
wastewater services and water supply in 1989. These licences continue in force
for an indefinite period, subject to potential termination rights as set out
below. United Utilities Water holds the licence for an area of north west England
which comprises 3.1 million homes and businesses. The Water Industry
Act 1991 (the Act), as amended by the Water Act 2003 (the WA 2003), provides for the appointment (by way of licensing) of water and
sewerage undertakers. Economic regulation pursuant to these licences is currently the responsibility of the Water Services Regulation Authority (until 31 March 2006 the Director General of Water Services). The Authority continues to be known as
Ofwat. Ofwat also exercises powers under UK competition legislation,
most significantly the Competition Act 1998 and the Enterprise Act 2002. The changes introduced by the WA 2003 have now been fully implemented. The WA 2003 is intended to promote greater water conservation and planning for the future by water companies,
revise the framework for water abstraction and impounding and help to build a more transparent regulatory environment. The WA 2003 has
extended opportunities for competition in the water industry in England and Wales
by introducing a new framework for the licensing of water supply. From 1 December
2005, water supply licensees have been able to provide both retail supply (i.e.
the supply by a licensee of water purchased from a water undertakers supply system to an eligible customer) and combined supply (i.e. the introduction of water
into an incumbent water companys existing network for retail by the licensee
to an eligible customer), to non-household users with an annual consumption of
not less than 50 megalitres per year. A water undertaker is obliged to allow
a licensed water supplier to use its network for this purpose, subject to payment
of a fee and certain conditions and rights of refusal. At the date of
this report, four such licences have been granted. Ofwat has produced guidance
for water supply licensing and published a Customer Transfer Protocol to facilitate
the transfer of customers to a new licensee. In line with the new water supply
licensing regime, from 1 April 2005 the threshold in the Act for an inset appointment
(whereby one licensed undertaker replaces another for a specific non-household
user)
was also reduced from 100 to 50 megalitres per year. To date there have been
no inset appointments granted which affect United Utilities Waters area.
United Utilities Water had already developed and published policies which allow
other companies access to its water networks in order to supply customers and
to self-lay new water mains and service pipes. These policies have been further
developed to facilitate competition in the industry under the WA 2003 and the
company welcomes
the new competitive developments in this field. The establishment of Ofwat as a regulatory board to be known as the Water Services Regulation Authority from 1 April 2006 brings the water industry into line with other regulated
industries where regulators have adopted a similar board structure. Appointments to Ofwat will be made by the Secretary of State for Environment, Food and Rural Affairs. This is in contrast to regulators in some states of the United States who hold
public office and are required to stand for public election. The previous Director General of Water Services, Philip Fletcher, has now been appointed chairman of Ofwat. The chairman will continue to be




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appointed
    for a fixed term and may only be removed from his post for incapacity or
    misbehaviour. A new independent Consumer Council for Water (the council)
    has replaced WaterVoice (previously Ofwats National Customer Council)
    and the regional Customer Service Committees. The council came into being
    on 1 October 2005, accompanied by nine regional committees for England and
    one
for Wales. Ofwat
    must comply with the statutory duties set out in the Act. It may receive
    guidance from the UK government in areas such as social and environmental
    policy and its views on the approach to price setting, and in the performance
    of its statutory functions. However, Ofwat is not subject to direction about
    what those judgements should be and is independent of government ministers.
    Ofwat must exercise and perform its powers and duties in the manner that
it considers is best calculated to: 
   protect the interests of consumers wherever appropriate by promoting effective competition between persons engaged in, or in commercial activities connected
with, the provision of water and sewerage services;
   secure that the functions of a water undertaker and of a sewerage undertaker are properly carried out in respect of every area of England and Wales;
   secure that relevant undertakers are able (in particular, by securing reasonable returns on their capital) to finance the proper carrying out of their
functions; and
   secure that the activities authorised by the licence of a licensed water supplier and any statutory functions imposed on it in consequence of the licence are
properly carried out. The
         licences impose conditions on licensees, which Ofwat enforces along
         with licensees principal duties under the Act. Licence conditions can
  be modified by Ofwat, either with the water undertakers agreement or
  following reference to the Competition Commission for a decision on public
  interest grounds.
  However, reference to the Competition Commission is not required where the
  changes are necessary or expedient to implement the new licensing regime for
  the supply
  of water services to large non-household users. United
           Utilities Waters licence contains similar restrictions to those
           contained in its electricity distribution licence. These restrictions
    include: 
   non discrimination;
   restrictions
       on the payment of dividends  any dividends can only be made in accordance
       with a written dividend policy of the directors of United Utilities Water
       which has been accepted by Ofwat as not impairing its ability to finance
    its business;
   prohibition on cross subsidies between United Utilities Water and associated companies;
   restrictions
       on the lending of funds to an associated company all transactions with associated companies must be on an arms
       length basis. The consent of Ofwat is required before lending any funds
       to an associated company. Any such transactions should undergo a process
       of market testing or involve the associated company being paid prices
       no greater than the cost incurred in providing the
goods and services plus a reasonable rate of return on any capital employed;
    and
   ringfencing of financial and management resources of the licensed business.


The licence may
be terminated on 25 years notice, with more immediate revocation in certain
specific circumstances (including, for example, failure to comply with an enforcement
order made by Ofwat). The WA 2003 also introduced financial penalties for breach of licence conditions
and other key duties to bring the industry into line with other regulated industries.
From 1 April 2005, companies may face a fine of up to ten per cent of turnover
for
breaching licence conditions, standards of performance or other obligations. Turnover is
derived from the regulated activities for the preceding regulatory year (in effect,
the latest set of regulated accounts), as more specifically set out in the Water
Industry (Determination of Turnover for Penalties) Order 2005. Ofwat has published
a statement of the policy that it intends to apply to the imposition of any penalty
and the determination of its amount. These penalties can be appealed, on procedural
grounds only, to the High Court. The new legislation also requires water companies
to disclose any links between directors pay
and company
performance. In practice, many regulatory issues arising between licensees and the water regulator
are settled without the need to resort to formal proceedings. However, where
Ofwat is satisfied that a licensee is in breach of the conditions of its licence,
it has powers to secure compliance by means of an enforcement order. Failure
to comply with an enforcement order can lead to enforcement in court, payment
of compensation
by
the licence holder to the injured party and, ultimately, to revocation
of the licence. Alternatively, where actual or likely contravention of an enforcement
order (or of one of a licensees principal statutory duties under the Act)
is so serious as to make it inappropriate for the licensee to continue to hold
its licence, Ofwat may, with the Secretary of States consent, apply to
the High Court for the appointment of a special administrator to run the company
until arrangements can be made for a new company to carry on the licensed activities.
A special administrator may also be appointed where the licensee is, or is likely
to be, unable to pay its debts. Ofwat regulates wastewater and water charges by capping the average increase
in charges that a company can impose in any year. Ofwat conducts a periodic review
and sets price caps every five years. It is currently consulting on the length
for which prices should be set at the next periodic review in 2009. Options under
discussion include both shortening and lengthening the current five-year period. This price cap is set by reference to inflation as measured by the retail price
index in the
UK plus an adjustment factor known as K, which is specific to each
company and which can vary for each year of the review period. The size of a
companys K factor (which can be positive, negative or zero) reflects the
scale of its capital investment programme, its cost of capital, and its operational
and environmental obligations, taking into account the scope for it to improve
its efficiency. Unlike rate of return economic regulation, such as exists in much
of the United States, price cap regulation in the UK is performance-based.
Companies are incentivised to be efficient, both in terms of their operating
costs and in the implementation of their capital expenditure programme. The benefit
of any efficiency savings achieved through effective management is retained by
the companies for a period of five years, after which time the benefit is passed
to customers via the subsequent price setting process. The cost of any under-performance
due to
poor management is borne by the companies. Companies are also




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|Business
    description continued |  |  | Operating
        and financial review
|                                   |  |  |                                       



incentivised
    to provide a high quality of service and penalised if they provide a poor
    quality of service by means of an adjustment to the K factor at the subsequent
    price review. The last periodic review was completed in December 2004 and
    covers the period from 1 April 2005 to 31 March 2010. In the last review,
    Ofwat set the following K factors; being the amount by which prices are allowed
    to rise above inflation in each of the five financial years commencing on
    1 April 2005: 2005/06
   5.0 per cent2006/07
   6.4 per cent2007/08
   4.4 per cent2008/09
   3.5 per cent2009/10
   3.0 per cent This
    equates to a real (before or excluding inflation) average annual price increase
over the five-year period of 4.5 per cent. Unexpected
    costs or savings arising from changes in certain regulatory assumptions during
    a review period are recorded and agreed by the company and Ofwat. This process,
    known as logging up and down, allows prices to be adjusted up
    or down at the next periodic review to compensate (companies or customers)
    for the unexpected change. In addition, where the change exceeds the specified
    materiality thresholds, the company can request, and Ofwat can instigate,
    a re-setting of its price limit during the five-year period, known as an
Interim Determination of K (IDoK). All water
    and sewerage companies licences now include a shipwreck or substantial
    effect clause, which allows
companies price limits to be revised when events beyond their control have
a significant effect on their costs or revenues. This clause is now included
in United Utilities Waters licence, allowing appropriate adjustment for
unforeseen events both adverse and
favourable. Environmental
        regulation of water and wastewaterThe water and wastewater
        industry in the UK is subject to substantial domestic and European Union
        regulation, placing significant statutory obligations on United Utilities
        Water with regard to, among other factors, the quality of treated water
        supplied and of wastewater treatment. European directives (including
        the Drinking Water Directive, the Bathing Water Directive and the Urban
        Wastewater Treatment Directive) are transposed into UK law by primary
        and secondary legislation such as the Water Supply (Water Quality) Regulations
        2000, the Water Industry Act 1991, the Water Resources Act 1991 and the
Environmental Protection Act 1990. All water
    and wastewater companies have a general duty to exercise their powers to
    conserve and enhance natural beauty and to promote the efficient use of water.
    Environmental regulation is the responsibility of the Secretary of State
for Environment, Food and Rural Affairs together with: 
   The Environment Agency, which is responsible for conserving and redistributing water resources and securing the proper uses of those resources, including the
licensing of water abstraction. The Agency also regulates discharges to controlled waters, including discharges from wastewater treatment works;
   The Drinking Water Inspectorate, which enforces drinking water quality standards; and
   English Nature (intended to be re-formed as Natural England from October 2006), which is responsible for the protection of designated sites for nature
conservation, e.g. Sites of Special


Scientific
       Interest. There is a statutory requirement to manage these sites to conserve
       or improve biodiversity. As a result of new UK government targets, English
       Nature is seeking improvements to approximately 50 per cent of the sites
    within United Utilities ownership.United Utilities Water expects regulatory regimes in the field of water and wastewater to continue to evolve and become more onerous. Examples of
such regulatory and legislative developments include the following:
   amendments to the Water Resources Act 1991 by the Water Act 2003, making new water abstraction licences time-limited and unused licences more easily
able to be revoked or varied without compensation, and creating a new statutory right of civil action where water abstraction causes loss or damage. Water undertakers will have a duty to promote water conservation when carrying out their functions,
and must publish drought plans and water resource plans. The government will also be able to require publication of flood plans showing the effect of a reservoir dam failure;
   The Water Framework Directive, transposed into UK law in 2003, which requires the UK government to:
   establish comprehensive river basin management plans, with a first set of plans in place by 2009 followed by further sets of plans on a six-year
cycle;
   implement the actions in the first set of river basin management plans by December 2015 at the latest;
   implement measures necessary to prevent deterioration in the ecological status of water bodies; and
   achieve good water
    status by 2027 at the latest.The Directive is likely to impact upon sewerage undertakers by requiring further improvements in discharges from wastewater networks and treatment
works; and
   The
       Water Supply (Water Quality) Regulations 2000, which transpose into UK
       legislation the Drinking Water Directive and, in particular, introduce
       more stringent lead standards (ten micrograms per litre (10ug/l) from
       25 December 2013) which will oblige water undertakers to carry out improvements
       to treatment works and distribution systems. To minimise lead concentrations
       at customers
taps, United Utilities Water installed additional phosphate dosing and pH control assets in the AMP3 period April 2000 to 31 March 2005. Over the same period, the company replaced 48,000 lead communication pipes with the agreement of the Drinking
Water Inspectorate (quality regulator), and a further 113,000 were replaced as part of the routine maintenance programme. Despite these steps, United Utilities Water may not achieve the final lead standard (of 10ug/l) in a number of water supply
zones unless some additional lead communication pipes are replaced. The company has agreed with the Drinking Water Inspectorate to replace up to 40,000 of its lead communication pipes in the period 1 April 2005 to 31 March 2010 (known as
AMP4) and expects to replace up to 109,000 as part of its routine
maintenance programme.
   The AMP4 Consumer Acceptability programme aims to improve the aesthetic quality of water for consumers, for example due to discolouration or taste
and odour. This programme was subject to a Regulatory Impact Assessment conducted by the Department for the Environment, Food and Rural Affairs. In order to improve the acceptability of water to its




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consumers
        and to reduce the risk of future discoloured water events, United Utilities
        has agreed a ten-year programme with the Drinking Water Inspectorate
        to clean and refurbish up to 602.2 km of its Large Diameter Trunk Mains
        and up to 4,689 km of smaller diameter mains, which have been subject
    to many years of iron and manganese deposition and corrosion. The European Union Urban Wastewater Treatment Directive, which was transposed
into UK legislation by the Urban Wastewater Treatment Regulations 1994, requires
improvements in the treatment of wastewater discharges, in particular, the provision
of secondary treatment. United Utilities Water continues to make progress towards
achieving this for wastewater treatment works serving areas with a population
equivalent of more than 2,000. The European Union Urban Wastewater Treatment
Directive also requires measures to be taken to limit pollution from storm-water
overflows. The group is currently in dialogue with the regulators in relation
to the scope of works required in order to meet this obligation and related regulatory
requirements. There are ongoing infringement proceedings by the European Commission against
the United Kingdom regarding the implementation of the Urban Wastewater Directive.
The European Commission has sent a reasoned opinion to the United Kingdom for
failure to designate, and to review correctly, sensitive and less sensitive areas.
The European Commission believes that the United Kingdom has not taken all measures
needed to reduce the nutrients in wastewater to remedy problems in sensitive
areas. Depending upon the outcome of this legal action, it could lead to the
designation of some of the Irish Sea as a sensitive area. This, in turn, could
lead to requirements being placed upon United Utilities Water to reduce the levels
of some nutrients in discharges from many of its wastewater treatment facilities
which feed into the Irish Sea. There are, in addition, other ongoing infringement proceedings by the European
Commission against the United Kingdom regarding the implementation of the Urban
Wastewater Treatment Directive, but these do not directly concern United Utilities
Waters appointed
area. Pursuant to the European Union Bathing Water Directive, the objective of which
is to protect public health and the environment from faecal pollution at bathing
waters, the Environment Agency samples and analyses certain designated bathing
waters around the UK coast for the presence or absence of various bacteria. A
revised Bathing Water Directive entered into force in March 2006, introducing
more stringent
microbiological standards. United Utilities Waters programme of wastewater
network and treatment projects relating to its operational facilities to improve
the quality of, and meet the required standards for, bathing waters in north
west
England, continues. There are proposals progressing at the European level which, if finally adopted,
will amend the Directive on the use of sewage sludge on agricultural land so
as to introduce tighter limits
for metals in sludge. While United Utilities Waters preferred route of
disposal for sewage sludge remains spreading on agricultural land, it is taking
steps to ensure that it has sufficient disposal capacity if that route ceases
to be acceptable, including the construction of new incinerators. Complaints of odour from wastewater treatment works could be actionable as statutory
nuisance under
the Environmental Protection Act 1990. Ofwats final determination of December
2004 allowed United Utilities Water expenditure of £29 million to deal
with odour, of which £11
million relates to activity at


three of its treatment works. A voluntary code of practice on such odour problems
was published by the Secretary of State on 19 April 2006. A test case decision of the High Court in January 2006 that certain of United
Utilities Waters wastewater treatment plant operations should, in addition,
be regulated under the Pollution Prevention and Control Regulations, may, depending
upon the outcome of an appeal, result in increased costs of compliance with environmental
legislation
in relation to such operations. As part of the five-year periodic review of prices, Ofwat takes into consideration
the capital investment programme which United Utilities Water needs to achieve
in order to comply
with environmental legislation. Electricity
distributionUnited
Utilities Electricity owns the distribution network which carries electricity
from the
National Grid along power lines to consumers premises on behalf of the
electricity supply companies who are United Utilities Electricitys customers.
The income derived from the distribution business depends in part on changes
in the demand for electricity by consumers in north west England. Demand for
electricity is affected by such factors as growth and movements in population,
social trends, economic and business growth or decline, changes in the mix of
energy sources used by consumers, weather conditions, energy efficiency measures
and other factors. The electricity distribution business is a regulated business
in which the average increase in charges, which a company may impose in any year,
is capped by the electricity regulator (as described in more detail below). Accordingly,
profit derived from the distribution business of United Utilities Electricity
also depends upon efficiency, achieved by reducing and controlling costs, and
providing high
standards of service. Key performance measures for the business relate to quality of supply. Electricity
supplies were available for 99.99 per cent of the time during the financial year
ended 2006,
sustaining the businesss high level of performance in managing the network
to maintain constant supplies for consumers. All the overall standards of performance
set by the Gas and Electricity Markets Authority (the electricity
regulator) were achieved. Under the regulatory interruptions incentive scheme, United Utilities Electricity
has been set network performance targets for the number and duration of customer
supply interruptions. The average number of interruptions per 100 consumers per
annum was 49.8+, out-performing the regulatory target for the year of 57.2. The
average number of minutes for which consumers were without supply was 47.5+,
beating the regulatory target for the year of 59.8 minutes. (Figures in this
paragraph denoted by + are unaudited by Ofgem at the date of this report). Economic regulation of electricity distributionThe
electricity industry in Great Britain is regulated under the Electricity Act
1989 (the Electricity Act), the Utilities Act 2000 (the Utilities
Act) and
the Energy Act 2004 (the Energy Act) by the Gas and Electricity Markets
Authority (GEMA). GEMA governs and acts through the Office of Gas and Electricity
Markets (Ofgem). The Electricity Act, as amended by the Utilities
Act, requires all companies distributing electricity in Great Britain to be licensed
unless they are covered by an exemption. Economic regulation pursuant to these
licences is the responsibility of GEMA. GEMA also exercises powers under UK competition
legislation, most significantly the Competition Act 1998 and the Enterprise Act
2002.




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|Business
        descriptioncontinued |  |  | Operating
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GEMA
      is led by a chairman who is an independent public servant appointed for a
      fixed term by the Secretary of State for the Department of Trade and Industry.
      This is in contrast to regulators in some states of the United States who
      hold public office and are required to stand for public election. The current
      chairman is Sir John Mogg, who was appointed from October 2003 for a period
      of five
  years. GEMA
    must comply with the statutory duties laid down in the Electricity Act as
    amended by the Utilities Act. In doing so, GEMA may receive guidance from
    the UK government in areas such as social and environmental policy. In carrying
    out its statutory duties, GEMA is required to exercise judgement, but is
    not subject to direction as to what those judgements should be and is independent
    of government ministers. The chairman of GEMA may only be removed from the
post for incapacity or misbehaviour. The
    primary duty of GEMA is to protect the interests of consumers, wherever appropriate,
    by promoting effective competition. In carrying out this duty, GEMA is required
to have regard to: 
    the
    need to secure that all reasonable demands for electricity are met; and
    the
    need to secure that licence holders are able to finance their activities. The
    UK government awarded electricity distribution licences in 2001. The licences
    continue in force for an indefinite period, subject to potential termination
    rights as set out below. United Utilities Electricity holds an electricity
    distribution licence that authorises it to distribute electricity anywhere
    in Great Britain. Under that licence, United Utilities distributes electricity
    across its distribution system covering an area in north west England comprising
2.3 million consumer premises. United
    Utilities Electricitys electricity distribution licence contains similar
    restrictions to those contained in United Utilities
Waters water licence. These restrictions include: 
    non
    discrimination;
    restrictions
        on the payment of dividends  the board of directors must provide
        a certificate of compliance before declaring dividends affirming they
        are satisfied that the business is complying with relevant licence obligations
        including that it has sufficient resources and that the making of the
        distribution will not cause it to be in material breach of any of the
        obligations in the
future;
    prohibition
        on cross subsidies between the electricity distribution business and
    associated companies;
    restrictions
        on the lending of funds to an associated company  the consent of
        GEMA is required before lending any funds to an associated company which
        is
not on an arms length basis;
    ringfencing
    of financial and management resources of the licensed business; and
    restriction
    on the disposal of any asset forming part of the distribution system. Licence
    conditions can be modified by GEMA either with the agreement of the licensee
    (or, in the case of standard conditions, with the agreement of the requisite
    proportion of licensees) or following reference to the Competition Commission
for a decision


on
    public interest
grounds. The licence can be terminated on 25 years notice given by the
Secretary of State. The licence can also be revoked in certain circumstances,
including where the licensee fails to comply with an enforcement order made by
GEMA. Breach of a licence condition can attract fines of up to ten per cent of
the licensed companys turnover. Ofgem has published a statement of the
policy that it intends to apply to the imposition of any penalty and the determination
of its amount. Any such penalty can be appealed, on procedural grounds only,
to the High Court. In practice, many regulatory issues arising between licensees and GEMA are settled
without the need to resort to formal proceedings. However, where GEMA is satisfied
that a company is in breach of the terms of its licence, it has powers to secure
compliance by means of an enforcement order. If a company does not comply with
the order (as well as potentially giving rise to third party action) compliance
can be enforced by the
courts and ultimately GEMA may revoke the licence. The Energy Act 2004 introduced a special administration regime, applicable to
the holders of electricity distribution licences, similar to that provided for
the water sector. GEMA or the Secretary of State can appoint a special administrator
to take over the management and operation of the company to secure its financial
recovery in the event of actual or threatened insolvency of the licensee. GEMA consulted during 2005 on proposed modifications to all distribution licences
designed to preclude discrimination by distribution network operators in the
provision of point of connection information to connections providers.
Distribution licences were subsequently amended in
November 2005. United Utilities Electricity is required to maintain certain standards relating
to the quality of supply of electricity in its licence area. These standards
take the form of guarantees at the individual customer level and are subject
to monitoring and compliance audits. Failure to meet guaranteed standards of
performance will result in a prescribed compensation payment to the customer
concerned. In addition, GEMA can impose fines on companies that fail to achieve
the guaranteed standards or are in breach of other licence obligations. GEMA regulates electricity distribution charges by capping the average charges
that a company can impose in any year. GEMA conducts a periodic review and sets
price caps every five years. This price cap is set by reference to inflation
as measured by the retail price index in the UK plus an adjustment factor known
as X which is specific to each company and which can vary for each
year of the review period. The size
of a companys X factor (which can be positive, negative or zero) reflects
the scale of its capital investment programme, its cost of capital and its operational
and environmental obligations, together with scope for it to improve its efficiency.
The last periodic review was completed at the end of 2004 and covers the period
from 1 April 2005 to 31 March 2010. For the 2005-10 review period, United Utilities
Electricity was allowed a real (excluding inflation) price increase of 8.2 per
cent in 2005/06 followed by constant real prices thereafter. Unlike rate of return economic regulation, such as exists in many
states of the United States, price cap regulation in the UK is performance-based.
Companies are incentivised to be efficient, both in terms of their operating
costs and in the implementation of their capital expenditure programme. The benefit
of any efficiency savings achieved through
effective management




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is retained by
  the companies for a period of up to five years, after which time the benefit
  is passed to customers via the price setting process. The cost of any under-performance
  due to poor management is borne by the companies. An incentive scheme was introduced
  by GEMA in April 2002 which provided greater focus on three specific service
  areas: number of interruptions to customers supplies; length of those
  interruptions; and quality of the telephone response to customers. GEMA consulted on its approach to the incentive scheme as part of the price control review; including the form of the scheme, targets and associated costs. It was agreed that the
  distribution network operators performance in those areas would continue
  to be incentivised. Under the scheme, United Utilities Electricity is subject
  to annual rewards and penalties depending upon its performance against pre-specified
  targets. Both rewards and penalties under the incentive scheme are capped at
3.0 per cent of annual revenues. GEMA has been
  consulting on the structure of electricity distribution charges since 2000.
  As a result of this consultation, there has been one significant amendment
  made to all distribution licences, including United Utilities Electricitys.
  From 1 April 2005, distribution network operators have been obliged to produce
  and implement charging methodologies (for both connection to and use of their
  distribution systems) as a result of the collective modification of the standard
  licence condition relating to the distribution use of system charges. The methodologies
  are required to set out the principles and methods by which electricity distribution
  charges will be
  calculated, including cost reflectivity and facilitating competition, and must
  be approved by GEMA. United Utilities methodology statement was initially approved
  by GEMA subject to clarification required on proposed extra high voltage (EHV)
  charges and reactive power charges. These clarifications have since been provided
and the statement has been approved by GEMA. GEMA has been consulting on the future governance of commercial contractual arrangements
that have previously been governed by the Distribution Use of System Agreements.
Ofgem propose to replace the current bilateral agreements with a single multilateral
contract, the Distribution Connection Use of System Agreement (DCUSA), as it
feels that it will improve transparency. Environmental regulation of electricity distributionAll
electricity companies have a general duty under the Electricity
Act
to have regard to the desirability of environmental preservation and conservation
and the protection of Sites of Special Scientific Interest when they formulate
proposals for development. United Utilities Electricity may be required to carry
out an environmental assessment when it intends to lay cables, construct overhead
lines or carry out any other development in connection with its licensed activities.
In response to discussions with environmental organisations in United Utilities
Electricitys operating area, and with the backing of Ofgem, the company
has undertaken work to assess the cost of converting from overhead cables to
underground  cables in designated areas on aesthetic grounds. There is a small
allowance of £5
million allowed by Ofgem for such work over the period 2005-10. United Utilities Electricity, in common with all other UK electricity companies,
owns and operates pressure-assisted high voltage cables. These operate at voltages
of 33,000V and 132,000V. These cables are either filled with nitrogen gas or
an insulating liquid. United Utilities operate both types, having 620km of the
latter type of cable.
Cables of the latter type are pressurised with a light oil type fluid.
In
the main the fluid is biodegradable,


although some older cables are pressured with a variety of fluid that is not.
The potential for loss into the environment of the fluid, due to leaks or third
party damage, is recognised nationally by all electricity companies and the Environment
Agency (EA). In order to mitigate the effects of any losses, United Utilities
Electricity is party to a national code of practice agreement with the EA. In
the last five years, the company has worked to minimise losses into the environment
and has reduced
annual loss to around 25kl from a high of 48kl in 2000  2001. As part of
the monitoring system, United Utilities Electricity has developed and implemented
a new software-based management system to identify and categorise leakage allowing
rapid deployment of resources to protect the environment. The possibility that electric and magnetic fields (EMFs) may cause adverse health
effects has been a topic of debate and research for many years. Over the last
20 years, major research programmes throughout the world have explored whether
EMFs have an adverse
impact on health. A large epidemiological study  the UK Childhood Cancer
Study  reported in December 1999 that there was no evidence that
exposure to magnetic fields associated with the electricity supply in the UK
increases risk for childhood leukemia, cancers of the nervous system, or any
childhood cancer. International bodies such as the World Health Organisation
and the International Agency for Research on Cancer and, in the UK, the National
Radiological Protection Board (NRPB) have investigated this issue and have concluded
that there is no established causal link between EMFs and ill health. The NRPB
was the UK body with statutory responsibility for advising on EMFs until April
2005 when it was subsumed into the Health Protection Agency (HPA), which has
taken on its radiation protection
functions. In March 2001,
the NRPB published a review of the state of the science and concluded for
the vast majority of children in the UK there is now considerable evidence that
the EMF levels to which they are exposed do not increase the risk of leukemia
or other malignant disease. However, it also noted that the possibility
remains that intense and prolonged exposure to magnetic fields can increase the
risk of leukemia in children but the epidemiological evidence is currently not
strong enough to justify a firm conclusion that such fields cause leukemia in
children. In the spirit of the precautionary approach, the NRPB published in
May 2003 a consultation document on how to limit exposure to EMFs and, in particular,
on whether the UK should adopt the more stringent exposure guidelines of the
International Commission on Non-Ionizing Radiation Protection (ICNIRP). In March
2004, the NRPB recommended that the ICNIRP guidelines should be adopted. Most
recently, a report published by the Childhood Cancer Research Group (CCRG) strengthened
the evidence that childhood leukemia rates are slightly higher near power lines,
but leaves the question of what causes this more confused than before, stating
that: There is no accepted biological mechanism to explain the epidemiological
results; indeed, the relation may be
due to chance. The independent Advisory Group on Non-ionising Radiation (AGNIR), which reports
to the Board of the HPA, has issued several reports relating to EMFs, considering
their possible link with an increased risk of cancer, including childhood leukemia.
AGNIR consider there to be insufficient newly published research that would,
at present, justify the development of any update to the 2001 NRPB report. United Utilities Electricity, in line with other Energy Networks Association
(ENA) member companies, carries out its activities in




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|Business
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accordance with Health Protection Agency guidance. The ENA is the trade association
for electricity companies in the UK. The ENA and its member companies are committed
to responsible behaviour in the light of the scientific evidence, including considering
any appropriate precautionary actions. United Utilities Electricity believes
that
present evidence does not justify any change in the electricity industrys
operating practices, or the everyday utilisation of electricity by its customers,
but United Utilities Electricity keeps this under review and looks to the Health
Protection Agency and UK government for advice on the issue. Infrastructure managementContract
Solutions has three distinct market-facing businesses: 
   Utility
       Solutions  develops and operates contracts in the UK applying the groups
    core infrastructure management skills;
   International  responsible for applying the groups
    core infrastructure management skills in selected overseas markets; and
   Industrial
       and Commercial Solutions  provides services to the public sector
       and commercial market, including multi-utility connections, metering services,
    water and liquid waste treatment services and facilities management. The financial year ended 31 March 2006 was the first full year of operations,
following a business reorganisation in 2004 aimed at delivering future sales
and profit growth through
clearer focus on target markets. Utility SolutionsThe
business develops and operates contracts in the UK utility market, serving over
12 million people in the UK. It has a focused approach to pursuing opportunities,
with the objective of securing long-term operational sources of income while
limiting overall financial exposure. During the year, the business secured two major new utility outsourcing contracts.
In April 2005, the business successfully commenced a five-year contract to deliver
Southern
Waters capital investment programme as part of a consortium. In June 2005,
Contract Solutions acquired a 15 per cent stake in a consortium that purchased
the north of England gas distribution network from National Grid Transco. Utility
Solutions secured a £1.1 billion eight-year contract to operate and maintain
the network, and manage the capital expenditure programme, on behalf of the consortium. 2005/06 was the first year of the new operations and maintenance contract with
Dwr Cymru Welsh Water for up to 15 years, continuing the relationship following
the expiry of the first four-year contract on 31 March 2005. Under the new contract,
the business provides water and wastewater services in North Wales, and water
services in South Wales. The business also provides shared services throughout
Wales, including
education and conservation activities and transport. The business continued to play a leading role in the delivery of part of Scottish
Waters four-year £1.8 billion capital investment programme, the funding
for which will be provided by Scottish Water to improve its services to 2.2 million
homes and businesses
across Scotland. Prior to the approval of bids for new contracts, a full risk analysis is carried
out to assess the risks associated with a project and to ensure that they are
mitigated to the appropriate extent, dependent upon expected returns and the
expected degree of control over the risks.


InternationalThe
International business develops and operates contracts in selected overseas utility
markets and serves over 7.4 million people outside the UK. In Australia, the
business focus is on maintaining the current portfolio of contracts and securing
long-term investment returns and operational sources of income while managing
the overall exposure from the contracts. Elsewhere, the overseas business focus
will be on pursuing long-term operations and maintenance opportunities, primarily
in the Gulf regions, with other existing international investments being managed
alongside any existing UK investments. The business continued to manage its existing portfolio of water and wastewater
operations through a number of joint ventures in parts of Scotland, Australia,
Poland, Estonia and
Bulgaria. In June 2005, the Tallinn concession company Tallinna Vesi was successfully listed
on the Estonia Stock Exchange through an Initial Public Offering. The International
business participated in this process by placing part of its total shareholding
in the business, reducing its stake to 11.5 per cent, but it remains the designated
international operator to the concession. Generally, the joint ventures have limited recourse to United Utilities. However,
the business has performance bonds and guarantees in place supporting joint venture
operations
(see Performance guarantees on page 25) and in some cases there are
bank letters of credit supporting equity commitments. On page 25 there is a discussion on the impact of foreign currency fluctuations
and the extent to which foreign currency net investments are hedged by currency
borrowings. The International business is affected by a variety of regulatory regimes and
regulatory risks, which are accepted to varying degrees by the client, the concession
company and/or the operator. For those contracts where it is the operator, United
Utilities is not the licensed entity but it may be a direct or indirect investor
in the licensed entity. In 2002, United Utilities completed its withdrawal from infrastructure management
in the Americas by withdrawing from IEBA, the Argentine electricity utility.
It disposed of its minority interest in IEBA on 28 April 2005. IEBA defaulted
on its repayments to bondholders in September 2002. There is no recourse to the
group in respect of these debts and the group has no further balance sheet exposure
to IEBA. Industrial and Commercial SolutionsIndustrial
and Commercial Solutions is comprised of four distinct businesses: 
   Connections  the Connections business provides multi-utility connections to connect domestic, industrial and commercial consumers to the existing utility
network infrastructure. In providing this service, the business designs and installs new electricity, water, gas and telecommunications infrastructure. During the year ended 31 March 2006, the business re-focused its sales and marketing effort
towards long-term strategic customers and larger projects, and this review of business operations led to the closure of out-of-area offices in Cardiff, Leatherhead and Falkirk, with contracts centrally managed from the Preston office. This business
secured £40 million of orders in the year ended 31 March 2006, including £16.1
million out-of-area orders;
   Metering  the
       metering business provides installation and maintenance services for electricity,
    water and gas meters.




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In the year ended 31 March 2006, the business installed 69,000 new water meters and installed or exchanged 126,000 electricity meters in north west England under a contract with
United Utilities North West. In addition, 402,000 gas meter installations and 152,000 electricity meter installations were carried out under a contract with British Gas Trading which runs up to January 2009. Under this contract, both gas and
electricity meters are installed by the metering business, with rental income then being received for up to 20 years after installation by a joint venture company which owns the meter assets and in which the group has a 50 per cent interest; •
      Industrial
         this business is a provider of specialist water and liquid waste
        services to industrial customers in the UK. In many instances, liquid
        waste is treated on site, under contract to the customer, in a dedicated
        facility which is constructed and owned by the business. The business
        also owns two sites for the receipt and treatment of tankered liquid waste
        from customers. The Industrial business currently treats approximately
        11 million tonnes of wastewater a year; and•
      Facilities
        Management and Energy Services  the Facilities Management business
        manages properties for clients under contract. The scope of operations
        includes arranging site services such as reception and cleaning, managing
        vacant space


and
        office management. During the year ended 31 March 2006, the business successfully
        mobilised two new local authority public sector facilities management
        contracts at Thurrock and Hertfordshire. The Energy Services business
        provides energy efficient infrastructure, such as lighting, to customers. Business
    process outsourcingVertex
    commenced trading in the UK in 1996. It is now a leading provider of business
    process outsourcing and technology services. The company develops and implements
    a range of outsourcing solutions for many leading organisations based on a
    diversified portfolio of long-term contracts across private enterprise, financial
    services, utility, central and local government sectors. In May
  2005, Vertex entered the UK and Canadian financial services sectors through
  the acquisition of Marlborough Stirling plc, a provider of outsourcing and technology
  services. Subsequently Vertex extended its presence in this sector through the
  acquisition of 1st Software Group Limited in March 2006. Vertex
  also has a presence in the North American utility sector, which it entered through
  the securing of contracts with Hydro-One in March 2002, and NiSource in June
  2005. Capital
  expenditure in the year ended 31 March 2006 was £205.0 million (2005:
  £42.0 million).




|People
       key contributors to corporate success                 
|---------------------------------------------------------------------
|                                                                     
|Table
      2: People  key contributors to corporate success        
|                                                                     
|Number
      of employees  financial year ended 31 March            
|                                                                     
|Licensed
      multi-utility operations                              
|Infrastructure
      management                                      
|Business
      process outsourcing                                   
|Telecommunications
      (discontinued operation)                    
|Other
      activities                                               
|                                                                     
|Average
      number of persons employed by the group during the year
|                                                                     

Substantially
  all of the groups employees are based in the United Kingdom. Good
    industrial relations remain a priority for United Utilities across the whole
    of its business and parts of the group have been recognised in the UK for
    excellence in this area. The group continues to recognise and work in partnership
    with a range of trade unions across the sectors in which it operates.
    A statement
    of principles governs the approach to labour relations across the group. In
        summary:•
      Licensed
        multi-utility operations  99 per cent of employees within United
        Utilities North West are now represented by trade unions for collective
        bargaining purposes under the terms of a voluntary collective agreement,
        underpinned by the Together in Partnership agreement. This
        Partnership is continuing to develop and is now being supported by joint
        training programmes, which have been very well received. The relationships
        with key union players are maturing and the company has received positive
        feedback from the unions on the partnership approach;•
      Infrastructure
        Management  approximately 72 per cent of employees within United
        Utilities Contract Solutions are now represented by trade unions for collective
        bargaining purposes, which includes employees engaged on the Northern
        Gas


Networks
        contract who transferred into the business during 2005. Other employees
        are employed on personal contracts and are not covered by collective bargaining
        arrangements. A review of union relationships has taken place in a number
        of business areas and these are being managed at a local level due to
        the diverse nature of the business and the different contracts operated
        by the business. A range of collective bargaining agreements exist which
        have been inherited following the TUPE transfer of employees from other
        employers. Relationships between the individual business areas and the
        unions continue to develop and positive feedback has been received on
        the partnership approach being adopted, particularly in the Welsh Water
        business. The aim is to embed partnership working within other business
        areas during 2006. As part of this development process, joint training
        programmes have been taking place between the individual business areas
        and unions, facilitated by the Partnership Institute; and•
      Business
        process outsourcing  around 45 per cent of the Vertex workforce
        is covered by collective bargaining arrangements and this is increasing
        as Vertex acquires new contracts in the public sector in the UK. Vertex
        has a progressive approach to partnership with its trade unions and has
        been recognised externally for best practice in this area. The 2005 pay
        review process was exemplary with high levels of co-operation between
        the parties.




|United
          Utilities Annual Report & Accounts 2006 | 13
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|                                     |  |  |                                     
|------------------------------------ |  |  | ------------------------------------
|Business
      description continued |  |  | Operating
      and financial review
|                                     |  |  |                                     



United
  Utilities remains committed to maintaining high standards of health and safety
  in every area of its business. The groups health and safety aims and objectives
  are integrated into the business planning processes. Progress is monitored regularly
  at all levels throughout the business. The groups
  risk profile is diverse and changing, as would be expected in a large multi-utility
  organisation. The company had 74 accidents in 2005/06 which were reportable
  under the Reporting of Injuries, Diseases and Dangerous Occurrences Regulations
  (RIDDOR) and a total of 103 lost-time accidents. These resulted in 2,173 working
  days lost, a rate of 11,564 per 100,000 employees. The Accident Incidence Rate
  (AIR) per 100,000 employees for the year was 548. This was below the AIR target
  of 660 set for the year. Performance targets have been reviewed and aligned
  to the HSE Revitalising Health and Safety strategy. Retrospective
  and forward-looking targets have been set to achieve a ten per cent year-on-year
  reduction to the AIR and accident-related lost-time rate as calculated from
  the year 2000 through to 2010. A short-term
  (18-month) strategy was developed with the primary aim of aligning the business
  health and safety management systems to one consistent framework. Five group-wide
  Key Policy Objectives were identified for 2005/06 and a further
  five have now been developed for the 2006/07 financial year. The main
  areas of progress in 2005/06 were the introduction of a Key Performance
  Indicator reporting process that measured reactive (lagging) and proactive
  (leading) indicators, implementation of a group-wide system to monitor work-related
  pressure, a review and benchmarking of occupational road-risk management measures
  and improvements to internal and external health and safety reporting via the
  internet and the companys intranet. Business
  continuity across United Utilities was reviewed in 2005/06 resulting in the
  revision of the Corporate Emergency Response Plan. A Virtual Watch Team was
  also established to monitor continually rising tide threats to the
  business and to advise the Business Continuity Steering Group and executive
  management as appropriate. A strategy for managing the threat of an influenza
  pandemic has been agreed by the board which includes a crisis management structure
  and escalation model, based on advice from Defra and the UK Department of Health.


The involvement
  of all staff in these initiatives is a prerequisite and the group has continued
  to work in partnership with a range of trade unions and employee representatives
  operating across the businesses. These processes will continue and will be developed
  further over the year ahead. The group
  is committed to improving its employees skills through training and development
  and nurturing a culture in which employees feel valued. The group encourages
  employees to work to their full potential and respects the dignity and rights
  of every employee and supports them in performing various roles in society.
  The group also challenges prejudice and stereotyping. The group is equally committed
  to involving employees through open and regular communications about business
  developments and issues of general interest, both formally and informally. The group
  is committed to fulfilling its obligations in accordance with the Disability
  Discrimination Act 1995 and best practice. As an equal opportunities employer,
  the group gives equal consideration to applicants with disabilities in its employment
  criteria and will modify equipment and working practices wherever it is safe
  and practical to do so, both for new employees and for those employees that
  are disabled during the course of their employment. Additionally, the group
  is committed to providing full support and appropriate training for employees
  who become disabled during the course of their employment so that they can continue
  to work in a position appropriate to their experience and abilities. As at
  31 March 2006, United Utilities Water had the principal operating facilities
  shown in table 3, all of which are owned by United Utilities Water and are freehold,
  except Sandon Dock which is leasehold. United Utilities Waters wastewater
  operations involve owning and managing assets, which include: 
      40,325
        kilometres of sewers;
      1,739
        pumping stations;
      371
        storage tanks;
      3,076
        combined sewer overflows;
      583
        wastewater treatment works; and
      34
        sludge treatment facilities.




|Property                                        |                                   |  |                        |    
|----------------------------------------------- | --------------------------------- |  | ---------------------- | ---
|                                                |                                   |  |                        |    
|Table
      3: Property                         |                                   |  |                        |    
|                                                |                                   |  | Approximate
      area |    
|Location                                        | Description                       |  | in
      hectares      | (1)
|                                                |                                   |  |                        |    
|Bowland
      Estate, Lancashire                | Reservoir/gathering
      grounds |  | 10,120                 |    
|Haweswater
      Estate, Lake District, Cumbria | Reservoir/gathering
      grounds |  | 9,900                  |    
|Longdendale
      Estate, Derbyshire            | Reservoir/gathering
      grounds |  | 7,490                  |    
|West
      Pennine Moors, Lancashire            | Reservoir/gathering
      grounds |  | 6,872                  |    
|Thirlmere
      Estate, Lake District, Cumbria  | Reservoir/gathering
      grounds |  | 4,850                  |    
|Huntington,
      near Chester, Cheshire        | Water
      treatment works       |  | 107                    |    
|Davyhulme,
      Greater Manchester             | Wastewater
      treatment works  |  | 89                     |    
|Prescot,
      Merseyside                       | Water
      treatment works       |  | 84                     |    
|Woodgate
      Hill, Greater Manchester         | Water
      treatment works       |  | 40                     |    
|Shell
      Green, Widnes, Cheshire             | Sludge
      processing centre    |  | 12                     |    
|Watchgate,
      Cumbria                        | Water
      treatment works       |  | 12                     |    
|Sandon
      Dock, Liverpool                    | Wastewater
      treatment works  |  | 8                      |    
|                                                |                                   |  |                        |    

|      |                                     
|----- | ------------------------------------
|Note:
|      |                                     
|(1)   | One
      hectare equals 2.47 acres.



|14 | United Utilities Annual Report & Accounts 2006
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United Utilities Waters water operations involve owning and managing assets which include: 
    184
      raw water impounding reservoirs and associated catchments;
    1,444
      kilometres of raw water aqueducts;
    113
      water treatment works;
    1,443
      kilometres of treated water large diameter trunk mains;
    455
      service reservoirs and water towers storing treated water;
    626
      pumping stations; and
    39,919
      kilometres of trunk and distribution mains. As at
  31 March 2006, United Utilities Electricitys facilities included 13,525
  kilometres of overhead lines, 42,930 kilometres of underground cables (operating
  at 132 kilovolts, 33 kilovolts, 25 kilovolts, 11 kilovolts, 6.6 kilovolts and
  400/230 volts), 18,100 ground mounted substations and 16,730 pole mounted transformers.
  United Utilities Electricity holds wayleaves which entitle it to run lines and
  cables through and across private land and in some circumstances these can be
  terminated by the landowner or occupier upon notice pursuant to the Electricity
  Act. However,
  United Utilities Electricity has statutory rights to seek the compulsory retention
  of a wayleave if termination is sought by the landowner/occupier. United Utilities
  Electricity does not anticipate that any significant relocation of these facilities
  will be required, although any relocation of a major portion of these facilities
  would have a material adverse effect on the business and financial position
  of United Utilities Electricity. Ground mounted sub-stations are situated on
  properties either owned by United Utilities Electricity or held under lease.
  Pole mounted transformers are generally held under wayleave agreements. United
  Utilities Electricity anticipates that it will be able to negotiate lease renewals
  on satisfactory terms or relocate equipment so that the non-renewal of any such
  leases would not have a material adverse effect upon United Utilities Electricity. At 31
  March 2006, Contract Solutions key facilities were leased head office
  accommodation in Birchwood, Warrington and Industrial & Commercial Solutions
  offices at Old Trafford, Manchester. In addition to these sites, the business
  occupies various properties in support of specific contracts, typically within
  the geographic boundaries of the contracts, both in the UK and overseas. These
  sites consist of offices, depots and operational facilities that are primarily
  owned or leased by the client. It is anticipated that the business will be able
  to negotiate renewals of any expiring leases, or relocate the relevant facilities,
  without having a material adverse impact on the business. Vertexs
  facilities include leased customer management centres and support offices at
  Knowsley, Prescot, Warrington, Whitehaven, Edinburgh, Nairn, Forres, Dingwall,
  London, Birmingham, Speke, Grays, Stevenage, New Delhi (India) and in Denver
  (Colorado,USA). Properties in Warrington and Manchester are leased from the
  groups infrastructure management business. Its head office has moved to
  Prescot and it is currently marketing the former head office building in Manchester. Following
     the acquisition of Marlborough Stirling, now known as Vertex Financial Services

  Division, Vertex also leases premises in Bristol, Basingstoke, Cheltenham,
    Chester  and Cobham. There are overseas operations in Douglas (Isle of Man),
    Dublin (Ireland),
  Toronto and Vancouver (Canada) and Lugano, (Switzerland). Vacant premises in
     Cheltenham, Frimley and Woking are currently being marketed.


In addition
  to the properties described above, the group occupies various non-operational
  properties consisting primarily of offices, depots, warehouses and workshops.
  These are either owned by the company or leased. It is anticipated that the
  company will be able to negotiate renewals of any expiring leases, or relocate
  the relevant facilities, without having a material adverse impact on the company.
  The most significant of these non-operational properties are: the companys
  London office, which is leased by the company; the companys headquarters
  in Warrington which is owned by United Utilities Property Solutions; United
  Utilities Waters operations and customer centres in Warrington, which
  are owned by United Utilities Water and United Utilities Electricitys
  operations; and customer centres in Manchester, which are owned by United Utilities
  Electricity. United Utilities Contract Solutions head office in Warrington
  is leased. In February
  2004, the company, through a subsidiary, entered into a 15-year joint venture
  agreement with Amec Developments Limited to develop land at Lingley Mere, Warrington.
  Over a period of time, the company will invest up to £20 million in this
  joint venture, mainly in the form of land. The contaminated
  land regime in Part IIA of the Environmental Protection Act 1990 places liability
  for the clean-up of contaminated land upon any person who caused the contamination
  or, in some circumstances, who knew of its presence and failed to prevent it.
  If no such person can be found after a reasonable enquiry has been made, liability
  for clean-up falls upon the current owner or occupier of the land. The regime
  provides for exemptions from liability in certain cases. The company is not
  aware of any liability which it may have under the regime, which will have a
  material adverse impact on its businesses. The
    company  believes that all of its properties are in a reasonable state of
    repair and are
  adequate for their purpose. The company has a continuing programme of improving,
     replacing and disposing of property when considered appropriate to meet
    the
  needs of its business operations. It is not aware of any material environmental
     issues which would prevent the anticipated utilisation of the above-mentioned

  properties. Some non-operational areas of United Utilities Waters wastewater
   treatment works, including Irlam, Manchester, may be affected by contamination.

  At present, it is not clear how the liability for the clean-up will be allocated,
   or the extent of the cost for such work. However, this is not expected to
  have
  a material impact on the companys results.




|United
          Utilities Annual Report & Accounts 2006 | 15
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|                         |  |                                                                                                                     |                                     
|------------------------ |  | ------------------------------------------------------------------------------------------------------------------- | ------------------------------------
|Performance
      review |  |                                                                                                                     | Operating
      and financial review
|                         |  |                                                                                                                     |                                     
|                         |  |                                                                                                                     |                                     
|                         |  | Customer
      interruptions to electrical
      supply per 100 customers (2005/06)49.8
      (2004/05:
      47.0)
|                         |  |                                                                                                                     |                                     
|                         |  |                                                                                                                     |                                     
|                         |  |                                                                                                                     |                                     



In this
  section, references to segmental operating profit are defined as segmental
  operating profit before restructuring costs and the amortisation of certain
  intangible  assets for a segment as shown in note 1 of the consolidated financial
  statements on page 75. Non-GAAP measuresThe
    group gives certain additional information in order to provide an increased
    insight into the underlying performance of the business, in line with managements
    own view. An explanation of these presentations is given below. a. Operating profit from continuing operations before restructuring costs;
    and b. Profit before taxation from continuing operations before restructuring
    costs and the impact of IAS 39 Financial Instruments: Recognition and
    Measurement Operating
    profit from continuing operations before restructuring costs can be derived
    from the consolidated income statement of the financial statements.
    The board believes this financial measure provides useful information to
    investors as it is the measure that management uses to evaluate trading performance. It
    therefore aligns the performance measure reported to investors with that used
    by management to monitor performance and allocate resources within the business.
    Operating profits from continuing operations before restructuring costs are
    used to evaluate the trading performance of the group, because management
    believes that the exclusion of restructuring costs (which, by virtue of their
    size, are disclosed separately and may vary significantly each year) provides
    a more accurate comparison of annual performance. Management
    believes that providing additional measures under IFRS (as reconciled in tables
    4 and 5) which remove the negative impact of restructuring, gives a clearer
    understanding of the groups core trading activities, is of relevance
    in assessing the future direction of the group and clarifies the trends in
    trading performance. Profit
    before taxation from continuing operations before restructuring costs and
    the impact of IAS 39 can be derived from the consolidated income statement
    of the financial statements and is reconciled to profit before taxation from
    continuing operations in table 5. The board believes this financial measure
    provides useful information to investors as it is one of the measures that
    management uses to evaluate trading performance. Management believes that
    the exclusion of the impact of IAS 39, which has introduced some volatility
    to the income statement provides a more accurate comparison of annual performance.


Table
        4:2006
      
      2005For
        the year ended 31 March
      £m
      
      £mOperating
        profit from continuing operations
      740.0
      
      651.4Restructuring
        costs
      25.5
      
      29.7Operating
        profit from continuing operationsbefore
        restructuring costs
      765.5
      
      681.1Table
        5:2006
      
      2005For
        the year ended 31 March
      £m
      
      £mProfit
        before taxation from continuing operations
      439.3
      
      367.6Restructuring
        costs
      25.5
      
      29.7Fair
        value loss on debt and derivative instruments
      15.7
      
      Profit
        before taxation from continuing operations before restructuring costs
        and the impact of IAS 39
      480.5
      
      397.3 Although
    the board uses these non-GAAP financial measures to analyse trading performance,
    operating profit from continuing operations as shown on the face of the income
    statement, which is reconciled to operating profit from continuing operations
    before restructuring costs in table 4, and profit before taxation from continuing
    operations as shown on the face of the income statement, which is reconciled
    to profit before tax from continuing operations before restructuring costs
    and the impact of IAS 39 in table 5, should also be considered. c. Segmental operating profit from continuing operations before the amortisation
        of certain intangible assets and restructuring costsSegmental
    operating profit before the amortisation of
    certain intangible assets and restrucuturing costs is directly derived from
    note 1 of the consolidated financial statements. The adjustment for the
    amortisation
    of
    certain intangible
    assets relates to amortisation charged to the income statement during the
    year in respect of intangible assets arising on acquisitions undertaken since
    the date of transition to IFRS 3 Business Combinations (1 April
     1999). Prior to the adoption of IFRS, the value of such intangible assets

  would have been reflected within goodwill. The
    board considers removing the negative impact of this intangible asset amortisation
    charge from the segmental operating profit/(loss) to be relevant due to the
    size of the charge relative to the results of the business process outsourcing
    segment following the acquisition of Marlborough Stirling Group plc. Further,
    the board considers that the removal of the negative impact of restructuring
    gives a clearer understanding of segmental trading performance, is of relevance
    in assessing the future direction of the segments and clarifies the trends
    in trading performance.




|16 | United
        Utilities Annual Report & Accounts 2006
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| |  | 
| |  | 
| |  | 
| |  | 
| |  | 



Table
        6a:Licensed
      
      
      
      Businessmulti-utility
      
      Infrastructure
      
      processoperations
      
      management
      
      outsourcingYear
        ended 31 March 2006
      £m
      
      £m
      
      £mSegmental
        operating profit from continuing operations before the amortisation of
        certain intangible assets and restructuring costs
      652.3
      
      95.5
      
      20.8Amortisation
        of certain intangible assets
      
      
      (1.1
      )
      (8.7
      )Restructuring
        costs
      (0.1
      )
      (4.7
      )
      (20.7
      )Segmental
        operating profit/(loss)
      652.2
      
      89.7
      
      (8.6
      ) Table
        6b:Licensed
      
      
      
      Businessmulti-utility
      
      Infrastructure
      
      processoperations
      
      management
      
      outsourcingYear
        ended 31 March 2005
      £m
      
      £m
      
      £mSegmental
        operating profit fromcontinuing
        operations before theamortisation
        of certain intangibleassets
        and restructuring costs
      564.6
      
      90.0
      
      24.3Amortisation
        of certain intangible assets
      
      
      0.6
      
      (3.2
      )Restructuring
        costs
      (22.9
      )
      (1.5
      )
      (4.9
      )Segmental
        operating profit
      541.7
      
      89.1
      
      16.2 In
      assessing  the financial position and results of the segments, management
      believes that
    providing this additional measure gives a clearer understanding of the underlying
       trading performance. d. Borrowings net of cash and short-term depositsBorrowings,
    net of cash and short-term deposits can be derived from the consolidated
    balance
    sheet of the  financial statements. This measure, which is analysed
    in table 7 below, is used to assess the groups liquidity position by
    reference to the groups committed level of funding. The group seeks
    to ensure that sufficient funding is available to meet foreseeable requirements
    plus headroom for contingencies. Table
        7:2006
      
      2005For
        the year ended 31 March
      £m
      
      £mBorrowings
         current
      (619.1
      )
      (512.3
      )Borrowings
         non-current
      (5,081.1
      )
      (4,669.0
      )Cash
        and short-term deposits
      1,513.5
      
      902.7Borrowings
        net of cash and short-term deposits
      (4,186.7
      )
      (4,278.6
      ) Where
    these non-GAAP measures are included elsewhere in the annual report and Form
    20-F (as indicated by the symbol *), the above definitions should be referred
    to.


Group resultsOverviewUnited
    Utilities delivered another strong financial performance in the year to 31
    March 2006. Profit before taxation before restructuring costs and the impact
    of IAS 39* increased to £480.5 million, an increase of 20.9 per cent.
    Operating profit from continuing operations before restructuring costs* increased
    by 12.4 per cent to £765.5 million. The
    regulated business had a successful year with segmental operating profit*
    up 15.5 per cent, in part benefiting from the planned re-scheduling of the
    infrastructure renewals programme, which has resulted in the deferral of around
    £15 million of expenditure to 2006/07 and 2007/08. Capital investment
    across the regulated water, wastewater and electricity operations totalled
    £582.2 million. For the sixteenth consecutive year, capital expenditure
    has exceeded the profit earned for shareholders as the company invests to
    improve quality and service for its customers. United
    Utilities Contract Solutions has delivered impressive growth by using the
    groups core utility skills and further consolidated its position as
    the leading utility infrastructure outsourcing company in the United Kingdom.
    As the infrastructure management business grows, it provides the opportunity
    for the group to benefit from further economies of scale and exchange of best
    practice. The mobilisation of a number of significant new contracts during
    the year led to a 35.2 per cent increase in revenue. A focus on strong performance,
    driven from the disciplines of operating within robust contractual frameworks,
    provides a solid base from which to pursue other infrastructure outsourcing
    opportunities. Vertex
    has successfully renewed a number of significant contracts and has adjusted
    its cost base to enhance the businesss competitiveness. Vertex Financial
    Services has built on the Marlborough Stirling acquisition through the purchase
    of 1st Software Group Limited and will provide independent financial advisers
    with a single system covering the front and back office, enhancing its market
    offering and providing the opportunity to drive growth. Since the start of
    the financial year, new contracts valued at more than £40 million have
    been signed in the life and pensions business of Vertex Financial Services.
    It has a pipeline of opportunities going forward worth over £300 million,
    with many of the potential outsourcing contracts offering relatively attractive
    margins. Following
    the successful completion of the second stage of the rights issue in July
    last year, the group took advantage of the favourable market opportunities
    to raise long-term, index-linked debt. Since September 2005, a total of £600
    million of this debt has been issued, with maturities ranging from 30 to 43
    years and real interest rates ranging from 1.3 to 2.0 per cent. A drawdown
    of around £200 million has also been agreed from a ten-year loan facility
    provided by the European Investment Bank, in the form of index-linked debt
    with an effective real




|United
          Utilities Annual Report & Accounts 2006 | 17
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|                                   |  |  |                                   
|---------------------------------- |  |  | ----------------------------------
|Performance
      review continued |  |  | Operating
    and financial review
|                                   |  |  |                                   



interest
    rate of 2.25 per cent. In addition to providing a good match for the groups
    revenue profile which is linked to inflation, the relatively low cost of this
    funding has secured substantial additional value for shareholders. This represents
    outperformance of over £80 million when compared with the regulators
    cost of debt allowance for the current five-year period. During
    the year, the companys pension scheme investments achieved an average
    investment return of around 23 per cent across all asset classes. Following
    the £320 million lump sum prepayment made in March 2005, which rolled-up
    the 2005-10 contributions, the pension schemes are showing a net surplus of
    £19.3 million at 31 March 2006. Strategy and outlookIn
    the regulated businesses good progress has already been made in meeting the
    efficiency challenges set by the regulators. Successful delivery of the capital
    investment programme is vital and the partnership framework approach that
    has been developed will help to optimise the companys performance. The
    current strategy is to target customer service and operational performance
    improvement. With further real price increases ahead, the regulated businesses
    should continue to deliver strong profit growth. The
    core skills from the regulated businesses apply also in United Utilities Contract
    Solutions. Given its current market leadership position, the company is well
    placed to take advantage of outsourcing opportunities that seem likely to
    arise in the utility sectors. There is potential for more exchange of best
    practice within the group to make further performance improvements in operating
    both other companies and the groups own assets. The business has
    a robust order book in place, which should drive continued growth in revenue
    and it has a solid base from which to pursue other outsourcing opportunities. Vertexs
    growth record is impressive. Few businesses have profitably grown third party
    revenue from zero to over £300 million within six years. As a mark of
    this success, client revenues from United Utilities as a client are likely
    to reduce further over the next two years, from around a quarter today. Vertex
    has some good opportunities in the pipeline, particularly in the public sector
    and financial services sector. Overall,
    the groups progress means it has a strong platform from which to develop. Financial performanceGroup
    revenue from continuing operations increased by 13.5 per cent to £2,386.8
    million in 2005/06 compared with £2,103.7 million in 2004/05. These
    movements reflect growth across the licensed multi-utility and support services
    businesses. Operating
       profit from continuing operations increased by 13.6 per cent in 2005/06
      to
    £740.0 million. Operating profit from continuing operations before
    restructuring  costs* increased by 12.4 per cent in 2005/06 to £765.5
    million. The
    net finance expense for the year was £300.7 million compared with £283.8
    million in 2004/05. The increase in 2005/06 primarily reflects the impact
    of IAS 39 introduced for the first time from 1 April 2005 of £15.7 million.
    Excluding IAS 39, the net finance expense has increased by 0.4 per cent from
    £283.8 million to £285.0 million.


Profit
    before tax from continuing operations in 2005/06 increased by 19.5 per cent
    to £439.3 million. This is stated after restructuring charges of £25.5
    million (2004/05: £29.7 million) (discussed below). Basic
       earnings per share, relating to continuing operations, increased by 8.1
      per
    cent to 37.3 pence in 2005/06 (2004/05 34.5 pence), largely as a result of
       the increase in operating profit. Prior
    period earnings per share has been re-presented to take account of the bonus
    element of the rights issue. The
    amortisation of certain intangible assets (see note c on page 16) was £9.8
    million in 2005/06 and £2.6 million in 2004/05 in respect of continuing
    operations. The amortisation of certain intangible assets in 2005/06 consisted
    of £8.7 million relating to business process outsourcing (2004/05: £3.2
    million) and £1.1 million relating to infrastructure management (2004/05:
    £0.6 million credit). The increase in 2005/06 principally reflects the
    amortisation charge arising from the acquisition of Marlborough Stirling Group
    plc by Vertex, which was completed in May 2005. The
    dividend per ordinary share for the year is 43.87 pence, an increase of 3.4
    per cent consistent with the groups policy of growing dividends in line
    with inflation when compared with the dividend per ordinary share in 2004/05
    of 42.43 pence (represented to take account of the bonus element of the rights
    issue). The
    valuation of the groups pensions schemes under IAS 19 results in a net
    pension surplus at 31 March 2006 of £19.3 million compared with a net
    obligation of £84.6 million at 31 March 2005. The group made a lump
    sum pensions contribution of £320 million, split between the groups
    two defined benefit pension schemes, on 31 March 2005. The group does not
    expect to make any further cash contributions during the 2005-10 period into
    the defined benefit schemes, although the results of the next actuarial valuation
    will be incorporated into the 2007/08 financial statements. RestructuringRestructuring
    costs, which are disclosed separately on the face of the consolidated income
    statement, are as follows: Table
             8:2006
      
      2005For
        the year ended 31 March
      £m
      
      £mRestructuring
        costs
      (25.5
      )
      (29.7
      ) Restructuring
    costs in 2005/06 of £25.5 million principally arose from the acquisition
    of Marlborough Stirling and from further restructuring, including severances
    and the rationalisation of property requirements in Vertex during the second
    half of the year.




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Restructuring
          costs in 2004/05 of £29.7 million principally related to the
          restructuring programmes in licensed multi-utility operations in preparation
          for meeting its 2005-10 efficiency challenges. In infrastructure management
          these related to the restructuring of the business units into market-facing
          business streams, focusing on their specific risks. In business process
          outsourcing, the costs related to a restructuring to form a divisional
  structure which reflects the markets in which the business operates. Discontinued operationIn
  line with the
  groups declared strategy to accelerate the disposal of its telecommunications business, Your Communications was sold to THUS Group plc on 26 February 2006.
  In accordance with IFRS, the assets and liabilities were adjusted to their fair value less costs to sell as at September 2005, when the business was deemed to meet the definition of a disposal group under IFRS 5, Non Current Assets Held for
  Sale and Discontinued Operations. A reduction in the carrying value of Your Communications of £147.7 million before taxation was recorded (£116.1 million post tax). The group has subsequently recorded a loss on disposal of
£9.1 million before taxation as a result of the exit (£14.3 million
  gain post tax). The initial consideration
for the sale of Your Communications was the issue to the group of 391,532,832
ordinary shares with a market value of 15.5 pence per share in THUS Group plc,
together with the option to acquire up to a further 4.8 per cent of shares in
THUS Group plc, dependent upon the enlarged groups future share price performance. TaxationThe current UK mainstream corporation tax charge in 2005/06, and credit in 2004/05 in respect of continuing operations, reflect the high level of accelerated tax allowances arising
from the capital investment undertaken by the group and the benefits of advance corporation tax planning established in earlier years. A tax credit arose in the previous year following the agreement of prior-year tax returns. The effective current ordinary tax charge relating to continuing operations is 10.9 per cent, compared with a credit of 8.2 per cent in 2004/05. Including deferred tax, there is an
effective ordinary tax charge of 27.4 per cent, compared with a charge of 26.1 per cent in 2004/05. Deferred tax is
a £72.6 million charge in 2005/06, compared with a £126.1 million
charge in 2004/05. The main reason for the decrease in deferred tax charge is
due to a change in the tax treatment of capitalised maintenance expenditure which
has resulted in an increase in the current tax charge. In terms of the
groups total contribution to business taxes in the year, in addition to corporation tax, the group has also borne a total amount of around £105 million
in relation to business rates and employers national insurance contributions. CashflowNet
        cash generated
        from continuing operating activities increased to £723.4 million, from £455.5 million in 2004/05. The increase in 2005/06 reflects the lump sum
        pension contribution of £320 million made on 31 March 2005 for
        the 2005-10 period, offset by increased operating profits discussed above. Tax payments remain low reflecting the benefits of previous tax planning and the current tax charge (see above).


A significant level
of capital investment continues to be made, mainly as a result of the water and
wastewater capital investment programme. The 2005/06 capital investment of £598.2
million in property, plant and equipment represents a 30.6 per cent decrease
over 2004/05, reflecting the phasing of the AMP4 capital programme. Cash
      receipts from the financial restructuring of joint ventures in 2005/06
      include the proceeds from the initial public offering of part of the groups
      investment in Tallinn. Cash payments in 2005/06 for the acquisition of
      subsidiaries and the purchase ofinvestments
      include the acquisition of Marlborough Stirling Group plc, 1st Software
      Group Limited
  and Northern Gas Networks Holdings Limited. Cash payments in respect of acquisitions
  in 2004/05 included the acquisition of Capgeminis 14.6 per cent equity
  stake in Vertex. £528.3 million was received from the issue of shares during the year, from the second stage of the rights issue and the exercise of share options. This compared with
£20.0 million received in 2004/05. Dividend payments
in 2005/06 represent an increase in line with the groups dividend policy. As a result of
the above, cash and cash equivalents increased by £578.3 million during
the year to
31
March 2006. Borrowings net
of cash and short-term deposits* decreased by £91.9 million to £4,186.7 million at 31 March 2006. Gearing, measured as borrowings net of cash and
short-term deposits* divided by total capital employed (being shareholders equity
plus borrowings net of cash and short-term deposits*), decreased to 61 per cent
compared with 67 per cent at 31 March 2005. The group seeks to ensure that sufficient
funding is available to meet foreseeable requirements plus headroom for contingencies. Significant
    changesManagement
  is not aware of any significant changes in the financial position of the company
  since 31 March 2006. LICENSED
      MULTI-UTILITY OPERATIONS Business objectivesUnited
  Utilities
  North West carries out the groups licensed multi-utility operations and
  aims to create value through the efficient management of its assets. The key
  objectives continue to be to deliver its regulatory contracts, to align its
  resources efficiently within the common geography of its licensed networks
  in north west
  England and to continue to improve service for customers. The business pursues
  strategies aimed at maximising the benefits of its multi-utility status and
  integrating its systems and procedures to generate efficiencies across its
  operations and
  provide a seamless service for customers. Within United Utilities
North West, three business streams have been created for water, wastewater and
electricity, to ensure end-to-end accountability and balanced decision making
on operating and capital expenditure. In addition, the customer business stream
manages the relationship with the groups regulated customer base, including
billing and cash collection.




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Financial
        highlightsRevenue
increased
by 8.5 per cent to £1,502.9 million in 2005/06, largely due to a real increase
of 5.0 per cent in water and wastewater prices and a 8.0 per cent real increase
in electricity revenues. This compares with 2004/05, when water and wastewater
prices increased by 8.9 per cent in real terms and when a real reduction of 3.0
per cent in electricity distribution prices was applied. Segmental
      operating profit* increased by 15.5 per cent to £652.3 million in
      2005/06, primarily reflecting the increase in revenue and cost efficiencies. Capital
      investment for the year was £582.2 million (2004/05: £858.7
      million). £440.6 million (2004/05: £706.9 million) was spent
      on water and wastewater and £141.6 million (2004/05: £151.8
      million) on electricity distribution. This is within the regulatory allowance
      for the year and reflects the re-phasing of expenditure from the first
      year of the capital programmesto
      future years. Capital expenditure is likely to peak at around £1
      billion in the third year of the five-year programme, and then gradually
      phase down as the business moves towards the conclusion of the 2005-10
      regulatory review period. Business performanceUnited
Utilities maintained water supplies to all customers during 2005/06 without the
need for
any water use restrictions. Improvements made to the water supply system during
the year will help ensure security of supply in dry weather and during maintenance
of key water distribution mains. The leakage level in the year reduced by around
50 megalitres per day, to 470 megalitres per day. In line with an action plan
agreed with
Ofwat, the company achieved its economic level of leakage at 31 March 2006. Meeting
this year-end spot leakage target places the business in a strong position to
sustain performance at around this level in order to achieve Ofwats twelve-month
rolling leakage target of 470 megalitres per day for 2006/07. In addition to
its water mains rehabilitation and replacement programmes, the company will be
spending around £70 million on finding and fixing leaks over the next four
years. Reservoir levels are over 90 per cent at the date of this report, in line
with expectations for the time of year. The business expects to maintain a healthy
supply-demand balance throughout the year, avoiding the need for water restrictions. United Utilities Water met or outperformed its key internal outputs targets during the year. It replaced 802 kilometres of water mains, restored a number of properties from the low
pressure and flooding registers and is on track to deliver its water treatment works quality programme. Drinking water quality has continued to improve and 2005 mean zonal compliance was 99.94 per cent, up from 99.92 per cent the previous year. In 2005/06, the score in respect of non-compliant wastewater treatment works (measured per head of population served) was 0.4 per cent. As part of the capital investment programme,
eight continuous discharge and 43 UID improvement projects were delivered during the year. In the calendar year ended December 2005, the business was prosecuted on eight separate occasions relating to pollution incidents and consent breaches (nine to December 2004). The
company continues to work closely with the Environment Agency, highlighting the reduction in pollution incidents as a particular target for the business. Investment in odour control systems also increased, addressing an issue that has become of
growing concern to some customers. The company has continued to focus upon the health and safety of its employees and delivered over 2,227 man-days of safety training over the year. United Utilities North West
gained Occupational Health and Safety (OHSAS):18001 accreditation and was awarded a four-star rating in the British Safety Council audit in January. The company has also cut the incidence rate for notifiable and reportable accidents from 7.43 (per
thousand employees) in 2004/05 to 7.18 in 2005/06.


Furthermore,
      service levels continued to maintain the Overall Performance Assessment
      (OPA) score, as measured by Ofwat, to 398.4 points in 2005/06 from 399
      in 2004/05. Regulatory targets on all customer service measures have been
      met or exceeded. The number of telephone calls answered within 30 seconds
  was 99.0 per cent, against a regulatory target of 86.0 per cent. In electricity
      distribution, both regulatory targets and the companys own internal
      targets for providing continuous supplies to customers were out-performed.
      The number of interruptions to supply in the year fell to 49.77 per 100 customers
      and the average duration a customer was without supply also decreased to
  47.49 minutes. United
    Utilities Electricity continued to focus on maintaining the integrity, security
    and safety of its electricity distribution network and outputs are in line
    with its five-year delivery plan. During the year, the business replaced
    or refurbished 221 km of overhead lines and replaced 95 km of underground
    cables. It also replaced or refurbished 428 switchgear units and replaced
    223
transformers in the 12 month period. Business
impactsTo
      ensure that higher levels of performance continue to be achieved following
      the acceptance of Ofwat and Ofgems final price determinations in
      December 2004, initiatives have been put in place to improve efficiency
and reduce cost: 
   at the start of the year, the Customer Sales and Service Delivery businesses were merged to form United Utilities North West. This has rationalised operations
and reduced management costs;
   a new customer billing system was implemented to improve customer service and increase efficiency, and the entire customer base has been successfully migrated
onto it;
   there has been increased focus on work planning, scheduling and field force productivity, and a new mobile communications system has been
implemented;
   the company has been looking at ways of optimising the way it manages its major assets in the North West, through its Integrated Performance Management project.
The successful pilot programmes have now been extended across the region;
   a number of transformation initiatives have been developed, which are primarily focused around implementing a range of business process changes to improve the
way the business operates; and
   additionally, the company is continuing to increase its focus on service and performance levels and new programmes and initiatives are being introduced to link
remuneration and performance for all staff. The group
    has a number of initiatives in place to leverage its increasing size and
    achieve additional efficiencies, particularly in the area of procurement.
    Earlier in the year the group signed a contract with a sole supplier to provide
    high-pressure and medium density polyethylene pipes to United Utilities Water,
    in addition to servicing the water and gas outsourcing contracts in the infrastructure
    management business. These initiatives should help to offset other cost pressures.
    For example, the business expects energy costs to increase by over 30 per
cent in 2006/07.


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The capital
    investment partnership framework approach is now embedded into the business.
    A range of integrated work teams have been set up to help reduce project
    management costs. A new project and investment management system to support
    delivery of the capital programmes is now up and running and benefits have
    also been realised through relocation of activities, shared systems and greater
  collaboration through the supply chain. At the
      time the water price review was concluded in December 2004, it was recognised
      that there was potential for additional investment relating to projects
    that were not part of United Utilities 2005-10 regulatory contract, but
      which might be confirmed as additional obligations during this period by
      the regulators. These potential projects, with an estimated maximum value
      of £500 million, continue to be the subject of discussions with the
      regulators and the evaluation process is not expected to be concluded before
      the end of the 2006
  calendar year. Approximately £200
    million of funding was provided in the 2000-05 period to deliver a number
    of obligations, primarily relating to the unsatisfactory intermittent discharge
    (UID) programme, which have been carried over into AMP 4. United Utilities
    Water, in its negotiations with the Environment Agency and Ofwat, is seeking
    to finalise requirements relating to those UID outputs and expects the bulk
    of this capital expenditure programme to be incurred over the next two financial
years. During
    the year, significant improvements have been made in managing cash and the
    problems associated with long-standing customer debt. Processes are in place
    to manage water customer debt in a way that is fair to customers and effective
    for the business. Furthermore, a range of initiatives remain available that
    provide support, such as the vulnerable customer tariff, an arrears allowance
    scheme and money advice services. United Utilities North West has a leading
    role in the Debt Focus Group of Water UK, an industry-wide body, looking
    at ways to improve the Department for Work and Pensions Water
    Direct scheme. It continues to lobby for changes to the benefits system
    to extend the range of state benefits from which deductions can be made and
to improve the take-up of such schemes. INFRASTRUCTURE
    MANAGEMENT Business
objectivesUnited
      Utilities Contract Solutions applies the core utility skills of the licensed
      multi-utility businesses through outsourcing contracts and is involved
      in the operation or management of assets representing around 35 per cent
      of the UK water industrys asset base. The business also provides
      gas services to over six million people and now serves a population of
over 17 million in the UK. It has three distinct market-facing businesses: 
   Utility
       Solutions is responsible for the groups utility outsourcing contracts in the UK. This market is heavily influenced by the regulatory cycle and by
company-specific strategic considerations such as changes in ownership or executive direction. The approach adopted by Scottish Water and Southern Water to deliver their capital investment programmes via outsourcing shows the continuing trend for
these larger outsourcing opportunities. The portfolio of existing contracts was enhanced during the year by the addition of a gas distribution network contract for Northern Gas Networks. The market-focused offering of the Utility Solutions business,
means it is well placed to take advantage of similar future opportunities.



    The
        diverse infrastructure management services provided by the four business
        units within the Industrial and Commercial Solutions business present
        growth opportunities within the UK domestic, industrial and commercial
        markets as companies continue to seek new ways to deliver cost-effective
        services. The key objective of this business is to develop bundled offerings
        that link these diverse propositions to new and existing customers in
      target markets.
    The
        International business applies the groups expertise in infrastructure
        management and operations to develop and manage utility projects around
        the world. It currently operates concessions in Bulgaria, Estonia, Poland,
    the Philippines and Australia. Financial highlightsRevenue
increased
by 35.2 per cent to £692.3 million in 2005/06, largely due to growth in the Utility Solutions business where the new Southern Water and Northern Gas
Networks contracts commenced during the year. Segmental operating
profit* increased by 6.1 per cent to £95.5 million in 2005/06, reflecting
the increasing maturity of contracts, the successful mobilisation of the new
Utility Solutions outsourcing contracts and improved performance in the connections
and metering business units within Industrial and Commercial Solutions. Segmental
operating profit* reduced in International due to reduced shareholdings in Manila
and Tallinn following Initial Public Offering disposals, and the disposal of
the Green Energy business in 2004/05. Segmental operating margin* of 13.8 per
cent compares with 17.6 per cent in 2004/05, having been held back due to the
impact of
contract start-up costs. Business performanceThe
infrastructure management business has grown rapidly since its creation and increasingly
benefits
from economies of scale and exchange of best practice across its range of contracts.
The value of the outsourced utility contracts which commenced during the year
totals approximately £3.3 billion. United Utilities Contract Solutions total
order book stands at around £5
billion. United Utilities Contract Solutions has improved both the operational and financial performance of the companies with which it holds contracts. The disciplines of operating within
robust contractual frameworks have helped the business to balance risk and reward and ensure that significant focus is placed on performance. This experience has improved the commercial skill sets of the business and places it in a strong position
from which to pursue other infrastructure outsourcing opportunities.


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Utility
SolutionsDuring
the year, the business successfully commenced three major new outsourcing contracts
with Dwr Cymru Welsh Water, Southern Water and Northern Gas Networks, which have
a
combined total contract value of £2.9 billion to United Utilities. These
new contracts, along with continued successful performance in the existing Scottish
Water Solutions contract, have formed the basis of the Utility Solutions
business results in 2005/06. The
      original Welsh Water contract, signed in 2001, expired on 31 March 2005.
      Following a competitive tender process, Utility Solutions retained the
      provision of operations and maintenance services on the water treatment
      assets in north and south Wales, and the wastewater treatment assets in
      north Wales. The new contract, which is for up to 15 years from 1 April
      2005 and subject to five-yearly performance reviews to coincide with future
      price control periods, also requires the provision of specified shared
      services, including an operational activity centre, education and recreational
      facilities. Over the course of the original contract to 2005, Dwr Cymru
      Welsh Water moved from near the bottom of the Ofwats Overall Performance
      Assessment tables to joint first position. The
      contract with Southern Water commenced in April 2005 and is being managed
      by a consortium consisting of United Utilitiesand
      Costain, which each have 40 per cent, and Montgomery Watson Harza which
      has a 20 per cent share.
  The contract is worth around £750 million to the consortium, which is
  responsible for project managing, designing and delivering more than 250 water and wastewater improvement schemes across parts of Hampshire and the Isle of Wight, West and East Sussex and Kent. Performance to date has been good, with the value of
  work and outputs exceeding Southern Waters expectations. United Utilities
acquired a 15 per cent stake in Northern Gas Networks, the consortium led by
Cheung Kong Infastructure, that purchased the north of England gas distribution
network from National Grid Transco early in the financial year. Subsequently,
United Utilities Contract Solutions secured a £1.1 billion, eight-year
contract with that company to operate and maintain the network, and manage the
capital expenditure programme, on behalf of the consortium. The contract covers
the management of around 36,000 km of gas mains, serving a population of more
than six million extending from the Scottish border to South Yorkshire and across
to Carlisle and
north Cumbria. On 1 June 2005, around 1,100 employees transferred to United Utilities
Contract Solutions. First year progress has been excellent. The business has
out-performed its operating and capital expenditure targets and its cash targets
and
has met its replacement expenditure targets. 2005/06 is the
second full year of the Scottish Water Solutions contract and is the peak year of the contract in terms of delivery of capital projects to meet regulatory
output targets. In partnership, Utility Solutions is helping Scottish Water deliver approximately £1.1 billion of its capital investment programme. During the year, investment of £453
million, including efficiencies, was
delivered. InternationalIn Tallinn, the concession joint venture company Tallinna Vesi was successfully listed on the Estonia Stock Exchange in June 2005 through an Initial Public Offering. As part of
this process, the International business placed part of its overall shareholding in Tallina Vesi, thereby reducing its interest by 11.5 per cent. The International business also retains the secure revenue stream as the designated international
operator.


In Australia, the
construction of a £7 million advanced wastewater treatment plant and network
at Victor Harbor for the South Australian Water Corporation and state government
was completed during the year. The Australia business has a 20-year contract
to operate and maintain the assets. Industrial
      and Commercial Solutions Metering performance
      in the metering services contract with British Gas Trading continues to
      exceed expectations, with high meter installation volume outputs being
      achieved. This high performance in meter installation volumes is repeated
      in the contract with United Utilities North West. Connections improved
    financial performance in the business compared with 2004/05 has been reported
    following a re-focusing of its sales and marketing effort towards long-term
    strategic customers and larger projects. A review of the multi-utility business
    operations during the year resulted in the closure of offices in Cardiff,
    Leatherhead and Falkirk, with the business now being centrally managed from
    the Preston office. New contract awards are ahead of expectations, which
    indicates that the new marketing campaign is having a positive effect. Industrial good
  operational and financial performance has been reported in the five-year contract
  with the Atomic Weapons Establishment to operate and maintain their water and
  wastewater assets. The contract provides for a potential extension to 20 years
  and the provision of ancillary services, such as capital maintenance. The services
  do not include handling radioactive or contaminant discharges. Facilities Management during
the year the business successfully commenced the local authority public sector
contract with Thurrock Unitary Council. This is a 15-year contract to provide
facilities and property management, highways engineering and transportation services,
working alongside Vertex. A second new local authority public sector
contract was also received during the year to provide facilities management services
to Hertfordshire County Council. Business impactsUnited
Utilities Contract Solutions business units serve different markets with
different influences. The management structure introduced in 2004/05 has increased
focus on
the differing risks which impact on business performance. A key issue as the business grows is to recruit, retain and develop the right people. A sponsorship scheme for undergraduate students, which involves a job placement whilst at
university, is now embedded into the business. In addition, recruitment for apprenticeship programmes in Wales, Scotland and in support of the gas contract in the north east of England and Yorkshire continues. The business aims to mitigate risks from operations by partnering with experienced and skilled specialist organisations to deliver the services required under contract, where this
is thought appropriate. The ability to identify resources to meet developments within the market is a priority of the business.




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BUSINESS
              PROCESS OUTSOURCING Business
        objectivesVertex
  is a leading international provider of business process outsourcing services
  and technology solutions. The business has three divisions which reflect the
  markets in which it operates: 
    the
        UK Public Sector and Utilities division has developed a proposal called Citizen
        First to act as a blueprint for the delivery of local government
        services. This approach has been applied to its Westminster City Council
        contract, which at the time of signing, was the UKs largest local
        government outsourcing deal worth up to £422 million. Citizen
        First was also applied to the successful bid for Thurrock Unitary
        Council;
    Vertex
        acquired Marlborough Stirling Group plc in May 2005, with the intention
        of creating a leading financial services outsourcing provider in the
        UK market. In March 2006, it acquired 1st Software Group Limited, which
        develops, markets and supports back office software for independent financial
        advisers (IFAs) in the UK. The combination of these acquisitions, together
        with Vertexs own outsourcing capabilities and scale, gives the
        business a strong platform to pursue significant outsourcing opportunities
        in the mortgages and life and pensions markets; and
    by
        drawing on its own extensive experience of de-regulation in the UK energy
        and utilities market, Vertex aims to pursue further opportunities within
        the large North American energyand
        utilities market as it continues to de-regulate. Its strategic alliance
        with IBM unites the two companies complementary skills and experience
        in customer management, business consultancy, transformational outsourcing
        and information technology. Vertex also owns a US-based debt collection
        business, First Revenue Assurance, based in Denver Colorado, which it
        acquired in March 2004. Financial highlightsRevenue
increased
by 2.1 per cent to £404.7 million in 2005/06, predominantly due to the
acquisition of Marlborough Stirling and the revenue from the new Thurrock and
NiSource contracts, offset by the Department for Work and Pensions contract coming
to a natural close and the reduced scope of the Powergen contract. Segmental operating
profit* declined by 14.4 per cent to £20.8 million, mainly reflecting the
completion of the Department for Work and Pensions contract and start-up costs
associated with the Thurrock Unitary Council contract. Business performanceThis has been a year of transition for Vertex. The strong performance on the Department for Work and Pensions contract should help the company compete for future potential
contracts in the public sector, a market which continues to offer good prospects in the medium-term. Vertex has adjusted its cost base in the 2005/06 financial year to increase its competitiveness. The company has moved more of its information technology and support functions
offshore and has also undertaken a property rationalisation programme in the UK. The associated restructuring charges are one-off in nature.


Vertex has been
successful in renewing a number of significant contracts. As a mark of this success,
given the growth in Vertexs overall portfolio of activity, as a proportion
of sales, client revenues from United Utilities are likely to reduce further
over the next two years, from around a quarter today. UK
      Public Sector and UtilitiesDuring
  April 2005, Vertex successfully commenced the first phase of its £427
  million, 15-year contract with Thurrock Unitary Council, to provide customer
  management, information technology and business process services. Progress
  is good. The customer contact centre went live in June 2005 and is exceeding
  its service level targets. In
      October 2005, Vertex also commenced a £26 million contract with Hertfordshire County
  Council for the provision of customer management and business process re-engineering
  services. This is the first phase of what is a strategic partnership with Hertfordshire
  County Council, the purpose of which is to transform public service delivery
  and continue to improve services for the residents. This relationship represents
  a significant step forward for the business as it is the first public sector
  strategic
  partnership Vertex has undertaken. Vertex
      continues to have a strong presence in the UK utilities sector and is able
      to offer clients in this sector a total solution, either combining operational
      locations both offshore and in the clients home market or by transferring
      client operations wholly offshore. Financial
      Services and Private SectorSignificant
  progress has been made in relation to Vertex Financial Services. The business
  has built on the Marlborough Stirling acquisition through the purchase of 1st
  Software Group Limited in March 2006. The initial consideration was £25
  million, plus a maximum of up to £13.5 million subject to certain performancecriteria
      being achieved over the next two years. This transaction strengthens Vertex
      Financial
  Services leading position in the market providing software to independent
  financial advisers. The combination of front and back office capabilities, offered through the integration of The Exchange and 1st Software, provides an excellent strategic fit. It will deliver a single system for seamless,
  straight-through-processing for independent financial advisers, along with a significant reduction in administration and transaction costs. This combination enhances Vertex Financial Services market
  offering and provides additional opportunity
  to drive growth. The financial services
order book has also grown substantially following the companys largest mortgage outsourcing contract win to date. In March 2006, a £45 million,
five-year outsourcing contract was secured with db mortgages (a new specialist lender owned by Deutsche Bank) to support its entry into the UK intermediary mortgage market. Vertex will deliver application processing and mortgage servicing utilising
its Omiga and Optimus software. In addition, in March 2006, Vertex purchased Eggs
49 per cent stake in its mortgage subsidiary, Vertex Mortgage Services Limited.
It also extended its mortgage services agreement with Egg and secured other contracts
with Livingstone Mortgages and GMAC-RFC in Canada.






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North
      AmericaIn
  North America, the company continues to focus on delivery of its contract with
  HydroOne and continues to pursue the significant opportunities afforded by
  de-regulation in the North American utilities market. Vertex also entered into
  an alliance deal with IBM in June 2005 and the first stage of the initiative
  was to team with IBM on its $1.6 billion contract with US multi-state utility
  NiSource to provide a customer contact centre and sales and billing services.
  This contract continues to progress well. Business
        impactsVertex
  has an active and robust corporate governance programme designed to manage
  strategic and tactical risks, which could impact the business. Risks are clearly
  identified and monitored on a regular basis.  LIQUIDITY
              AND CAPITAL RESOURCES The
      groups primary source of liquidity is cash generated from its ongoing
      business operations. As reflected in the consolidated cashflow statement
      on page 67, in the financial year ended 31 March 2006, net cash generated
      from the groups continuing operating activities was £723.4
      million, compared with £455.5 million in 2004/05. The water regulator
      and the electricity regulator have established price increase limits to
      2010 which will provide certainty for a major element of the groups
      revenues from ongoing operations, providing both a stable and a predictable
      source of funds. Treasury
        policyThe
  groups treasury function operates within policies approved by the board,
  does not act as a profit centre and does not undertake any speculative trading
  activity. It seeks to ensure that sufficient funding is available to meet foreseeable
  needs and maintains reasonable headroom for contingencies. Long-term borrowings
  are structured or hedged to match earnings, which are largely in sterling,
  indexed to inflation and subject to regulatory price reviews every five years.
  Exposure to interest rate movements for the following 12 months is largely
  eliminatedat the start of each financial year using short-term hedges. The credit quality of counterparties and individual aggregate exposures are reviewed annually. Debt financingMoodys Investor Service rates the credit of United Utilities PLC as A3 on a long-term basis with a stable outlook and P-2 on a short-term basis. Equivalent ratings published
by Standard and Poors Rating Services are BBB+ long-term with a stable outlook and A-2 short-term. The groups borrowings net of cash and short-term deposits* of £4,186.7 million at 31 March 2006 comprised £4,272.6 million of
bonds, £519.6 million of loans from the European Investment Bank (EIB  the groups largest investor), £80.5 million of long-term leasing, £561.0 million of bank loans and other borrowings, £69.6 million of
overdrafts and £196.9 million of joint venture borrowings, offset by £1,513.5
million of cash and short-term deposits. Shorter-term liquidityShort-term
liquidity
requirements are met from the groups normal operating cashflow. Further liquidity is provided by cash and short-term deposit balances, the companys
US$1.5 billion euro commercial paper programme, supported by committed bank facilities and committed but undrawn long-term credit facilities. Cash and short-term deposit balances were £1,513.5 million at 31 March 2006, compared with
£902.7 million at 31 March 2005.


Bank overdrafts,
which are repayable in less than one year, were £69.6 million at 31 March
2006, compared with £37.1 million at 31 March 2005. The weighted average
rate of interest on bank overdrafts was 5.57 per cent (2004/05: 5.16 per cent).
The group had available committed bank facilities of £1,000.0 million (2004/05: £875.0
million) of which £745.4 million was unutilised at 31 March 2005
(2004/05: £873.4 million). Of
      the amounts unutilised, £295.0 million expires within one year (2004/05: £100.0
      million), £125.0 million expires after one year but in less than
      two years (2004/05: £323.4 million), and the remaining £325.4
      million expires in more than two years (2004/05: £450.0 million).
      The US$1.5 billion euro commercial paper programme still provides for the
      periodic issuance of notes by United Utilities, United Utilities Water
      and United Utilities Electricity. At 31 March 2006, issuance totalled £218.2
      million. These notes will have a maturity of not less than one day and
      not more than 364 days and an interest rate determined at the time of issuance.
      United Utilities has entered into £1,000.0 million of credit facilities,
      as noted above, used primarily as support for the US$1.5 billion euro commercial
      paper programme. Longer-term
          liquidityThe
group has effective access to the international debt capital markets through
its €5 billion medium-term note programme which provides for the periodic
issuance by United Utilities, United Utilities Water and United Utilities Electricity
of debt instruments on terms and conditions determined at the time that the instruments
are issued. In addition, the group has a US$2 billion shelf registration with
the United States Securities and Exchange Commission. This enables effective
access to theUS
      bond market, allowing the holding company, United Utilities PLC, flexibility
      to access the US market in a similar way to the medium-term note programme.
      Neither programme represents a funding commitment, with funding only becoming
      committed when debt securities have been successfully issued. The currencies
      in which borrowings are held are disclosed in note 17 to the consolidated
      financial statements. The group arranged £225 million of new five-year medium-term committed bank facilities. In addition, an agreement for £200 million of funding from EIB remains undrawn.
The groups term loans were £5,550.1 million at 31 March 2006, compared with £5,063.2 million at 31 March 2005. Amounts repayable after more than five years comprise bank and other loans repayable between 2011 and 2053. Interest
rates range from 1.135 per cent to 14.83 per cent on £2,729.9 million (2004/05: £2,312.7 million) and are at floating rates on £405.7 million (2004/05: £377.3
million). Interest rate managementThe
group manages interest rate exposure by seeking to match financing costs as closely
as possible
with the revenues generated by its assets. The groups exposure to interest
rate fluctuations is managed in the medium-term through the use of interest rate
swaps and the use of financial futures contracts traded on the London International
Financial Futures and Options Exchange. The average interest rate for 2005/06
was
7.3 per cent, compared with 7.4 per cent in 2004/05. Quantitative and qualitative disclosures about market riskRisk managementThe principal financial market risks faced by the group are the risks of interest rate movements and foreign currency movements.




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        Utilities Annual Report & Accounts 2006
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Interest
      rate and foreign currency managementThe
  group uses a combination of interest rate swaps, futures and funding instruments
  to hedge exposure to interest rate volatility. The companys use of derivative
  instruments relates directly to underlying indebtedness; no speculative or
  trading transactions are undertaken. The proportion of borrowings at effective
  fixed rates of interest for a period greater than one year is set in conjunction
  with the level of floating rate borrowings and projected regulatory revenues
  that are exposed to inflationary adjustments (index linked). In addition, the
  company aims to manage its short-term budgetary commitments by ensuring that
  the majority of floating rate interest is fixed for periods of less than one
  year through the use of exchange-traded financial futures. The group has limited
  exposure to foreign currency exchange rate movements. Interest rate management
  and funding policies are set by the board. The group has elected not to designate
  any of its derivative instruments as hedges for US GAAP accounting purposes. Quantitative
      disclosure of market riskThe
  analysis in tables 10 and 11 presents the sensitivity of the market value of
  the groups financial instruments to selected changes in market rates
  and prices. The range of changes chosen reflects the groups view of changes
  that are reasonably possible over a one-year period. Market values are quoted
  values, or, where these are not available, those values are obtained by discounting
  cashflows at market rates and prices. The market values for interest rate risk
  are calculated by using a standard zero coupon discounted cashflow pricing
  model. For long-term borrowings, a favourable change in market value results
  in a decline in the value of borrowings. For other financial instruments, a
  favourable change in market value results in an increase in market value. Interest rate riskThe sensitivity
      analysis in table 10 assumes an instantaneous 1.0 per cent (100 basis points)
      move in interest rates for all maturities and all currencies from their levels
      at 31 March 2006 and 31 March 2005, with all other variables held constant.
      The movement in market value of borrowings and instruments hedging borrowings
      will result in immediate changes to the groups financial statements,
      since market values are
    now recognised on the group balance sheet under IFRS. Foreign currency riskThe sensitivity analysis in table 11 assumes an instantaneous 10.0 per cent change in foreign currency exchange rates against sterling from their levels at 31 March 2006 and 31
March 2005, with all other variables held constant. The +10.0 per cent case assumes a 10.0 per cent strengthening of sterling versus all other currencies and the -10.0 per cent case assumes a weakening of sterling. Contractual obligationsTable 12 summarises
the contractual obligations of the group and the effect such obligations are
expected to have on the groups liquidity and cashflow in future periods. Table 13 discloses
financial guarantees given by United Utilities in support of borrowings by subsidiary
companies, where the underlying obligation is already reflected in the disclosure
of long-term debt. The £519.5 million of financial guarantees relate to
borrowings by United Utilities Water and United Utilities Electricity from the
EIB. The capital commitments
of the group as at 31 March 2006 were £190.6 million, for which the group
has contractual commitments. The group also has obligations under its licence
to comply with the capital programmes as specified by the regulators. The purchase
obligations of the group primarily relate to services for which the group has
purchase orders or contractual commitments at 31 March 2006.


Table
12 includes interest payments on non-current borrowings held at 31 March 2006.
This does not take into account incremental financing in respect of future capital
commitments and the refinancing of existing long-term borrowings. It also does
not take into account interest receivable on cash balances. Floating interest
  rates for certain borrowings are assumed to remain constant until the borrowing
  is repaid. The interest payments shown exclude the impact of future inflation
  rates and derivative instruments, where applicable. Off-balance
        sheet arrangementsJoint
      ventures The
      group enters into joint ventures with consortium partners. The financial
      and legal structure of a joint venture is designed to limit the groups
      exposure to the extent of the equity investment and loans provided by the
      group, with no further recourse should the joint venture default. All joint
      venture arrangements have been incorporated into the groups results
      on a proportionate consolidation accounting basis. The joint venture normally
      enters into the main contract with the customer, for example, by taking
      on ownership of the assets subject to the contract. The consortium partners
      may then enter into subcontracts with the joint venture for the provision
      of services appropriate to their expertise. This enables the group to take
      on only those risks that fall within its normal commercial expertise, such
      as infrastructure management, whilst other parties will provide their skills
      to thejoint
      venture and take on those risks accordingly, for example, design and construction.
      However,
  the performance of any joint venture will affect the groups financial
  performance to the extent of its interest in such a joint venture. Performance guarantees
As part of the commercial operations of the group, performance guarantees are sometimes required by clients. These guarantees may be called where the standards of service set out
within the relevant contract are not fulfilled, and other possible remedies under the contract are not successful. Total guarantees
as at 31 March 2006, where a financial limit has been specified, were £124.3 million (2004/05: £84.1
million). A guarantee which has unlimited liability is supported by an indemnification agreement from a third party external to the United Utilities group. This indemnification agreement
follows the disposal of certain operations to a third party, and contains no limit on the value of indemnity available. Therefore any payments under this guarantee may be fully recoverable from the third party. A further guarantee
for £1.3 million supports a short-term contingent financial exposure of
a partnership company. This guarantee represents 50 per cent of the total contingent
financial exposure. Negotiations to reduce the value of this contingent financial
exposure are continuing and it is expected that any liability arising may be
met from resources within the partnership company. This would mean that the
guarantee would not be called. In certain circumstances, the group has issued guarantees and performance bonds to support its contribution to the performance of partnership companies. In some instances, the
partnership company is responsible for arranging the issue of the guarantee and the partners are required to provide an indemnity to the issuing financial institution for a share of that guarantee, usually in proportion to the respective
shareholdings in the partnership company. Where this is the case, recovery of any amounts paid under the guarantee will be in proportion to the indemnities provided. Therefore, the full value of the guarantee arranged by the group would only become
payable if the total project guarantee were to be payable in full.




|United
          Utilities Annual Report & Accounts 2006 | 25
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|                             |  |  |                                   
|---------------------------- |  |  | ----------------------------------
|Performance review continued |  |  | Operating
    and financial review
|                             |  |  |                                   

Table 9: Term funding

During the last financial year, the group raised £408 million of term funding. The details of this financing are as follows:

|                                                                 | Rate       |   | £m    | 
|---------------------------------------------------------------- | ---------- | - | ----- | 
|                                                                 |            |   |       | 
|Medium-term notes:                                               |            |   |       | 
|GBP 2035                                                         | 1.9799% IL |   | 100.0 | 
|GBP 2040                                                         | 1.7829% IL |   | 100.0 | 
|GBP 2041                                                         | 1.3258% IL |   | 50.0  | 
|GBP 2042                                                         | 1.5802% IL |   | 100.0 | 
|GBP 2046                                                         | 1.3970% IL |   | 50.0  | 
|                                                                 |            |   |       | 
|GBP 2013                                                         | Floating   |  | 6.5   | 
|                                                                 |            |   |       | 
|Loan notes                                                       |            |   |       | 
|                                                                 |            |   |       | 
|GBP 1.3 million                                                  | Floating   |  | 1.3   | 
|                                                                 |            |   |       | 
|Note:                                                            |            |   |       | 
|Floating
    rate interest rate, set by reference to GBP LIBOR. |            |   |       | 

Table 10: Interest rate risk

|                                                                                                                                                                                     |               |   | Market value change |   |                  |   | Market
    value change |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------- | - | ------------------- | - | ---------------- | - | ----------------------- | -
|                                                                                                                                                                                     |               |   |                     |   |                  |   |                         |  
|                                                                                                                                                                                     | Market value  |   | +1% movement        |   | 1%
    movement |   | Market value            |  
|                                                                                                                                                                                     | 31 March 2006 |   | in interest rate    |   | in interest rate |   | 31 March 2005*          |  
|Interest rate movement                                                                                                                                                               | £m            |   | £m                  |   | £m               |   | £m                      |  
|                                                                                                                                                                                     |               |   |                     |   |                  |   |                         |  
|Non-current borrowings                                                                                                                                                               | (5,289        | ) | 185                 |   | (214             | ) | (5,002                  | )
|                                                                                                                                                                                     |               |   |                     |   |                  |   |                         |  
|Derivatives                                                                                                                                                                          | (44           | ) | (67                 | ) | 87               |   | (55                     | )
|                                                                                                                                                                                     |               |   |                     |   |                  |   |                         |  
|Cash and short-term deposits                                                                                                                                                         | 1,514         |   | (1                  | ) | 1                |   |                        |  
|                                                                                                                                                                                     |               |   |                     |   |                  |   |                         |  
|*
      The market values for the analysis for the year ended 31 March 2005 have
      not been revised to include joint venture borrowings, nor does the analysis
    include cash. |              

Table 11: Foreign currency risk

|                                                                                                                                                                                     |               |   | Market value change |   |                   |   | Market
    value change |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------- | - | ------------------- | - | ----------------- | - | ----------------------- | -
|                                                                                                                                                                                     |               |   |                     |   |                   |   |                         |  
|                                                                                                                                                                                     |               |   | +10% movement       |   | 10%
    movement |   |                         |  
|                                                                                                                                                                                     | Market value  |   | in foreign          |   | in foreign        |   | Market value            |  
|                                                                                                                                                                                     | 31 March 2006 |   | exchange rate       |   | exchange rate     |   | 31 March 2005*          |  
|                                                                                                                                                                                     | £m            |   | £m                  |   | £m                |   | £m                      |  
|                                                                                                                                                                                     |               |   |                     |   |                   |   |                         |  
|Non-current borrowings                                                                                                                                                               | (5,289        | ) | 45                  |   | (70               | ) | (5,002                  | )
|                                                                                                                                                                                     |               |   |                     |   |                   |   |                         |  
|Derivatives                                                                                                                                                                          | (44           | ) | 24                  |   | (24               | ) | (8                      | )
|                                                                                                                                                                                     |               |   |                     |   |                   |   |                         |  
|Cash and short-term deposits                                                                                                                                                         | 1,514         |   | (49                 | ) | (66               | ) |                        |  
|                                                                                                                                                                                     |               |   |                     |   |                   |   |                         |  
|*
      The market values for the analysis for the year ended 31 March 2005 have
      not been revised to include joint venture borrowings, nor does the analysis
    include cash. |              

Table 12: Contractual obligations

|                                   |           |  |           |  |           |  | Payments due by period | 
|---------------------------------- | --------- |  | --------- |  | --------- |  | ---------------------- | 
|                                   |           |  |           |  |           |  |                        | 
|                                   | Less than |  |           |  |           |  | More than              | 
|                                   | 1 year    |  | 2-3 years |  | 4-5 years |  | 5 years                | 
|                                   | £m        |  | £m        |  | £m        |  | £m                     | 
|                                   |           |  |           |  |           |  |                        | 
|Borrowings                         | 619.1     |  | 1,754.8   |  | 190.7     |  | 3,135.6                | 
|Interest on borrowings             | 265.0     |  | 456.7     |  | 314.9     |  | 2,196.7                | 
|Capital lease obligations          | 5.3       |  | 13.8      |  | 19.1      |  | 42.3                   | 
|Operating leases                   | 13.4      |  | 21.3      |  | 16.1      |  | 198.6                  | 
|Purchase obligations               | 34.7      |  | 25.4      |  | 12.9      |  |                       | 
|Capital commitments                | 157.0     |  | 30.7      |  | 1.4       |  | 1.5                    | 
|                                   |           |  |           |  |           |  |                        | 
|Total contractual cash obligations | 1,094.5   |  | 2,302.7   |  | 555.1     |  | 5,574.7                | 
|                                   |           |  |           |  |           |  |                        | 

Table 13: Financial guarantees

|                             |           |  |           |  | Amount of commitment expiration per period | 
|---------------------------- | --------- |  | --------- |  | ------------------------------------------ | 
|                             |           |  |           |  |                                            | 
|                             | Less than |  |           |  |                                            | 
|                             | 1 year    |  | 2-3 years |  | 4-5 years                                  | 
|                             | £m        |  | £m        |  | £m                                         | 
|                             |           |  |           |  |                                            | 
|                             |           |  |           |  |                                            | 
|Guarantees                   | 16.5      |  | 213.0     |  |                                           | 
|                             |           |  |           |  |                                            | 
|                             |           |  |           |  |                                            | 
|Total commercial commitments | 16.5      |  | 213.0     |  |                                           | 
|                             |           |  |           |  |                                            | 



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        Utilities Annual Report & Accounts 2006
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Alternatively,
      the partners may be required to arrange the issue of separate guarantees
      directly to the client, normally contributing to the total guarantee requirement
      in proportion to the shareholding in the partnership company. In most cases,
      these arrangements are supported by cross-indemnities from the partners
      so that the partners must pay a proportionate share of any claim under
      any of the individual guarantees issued. Therefore, the full value of the
      guarantee arranged by the group will only become payable if the total project
      guarantee is called in full. Guarantees
      issued by the group directly to the client, supporting the performance
      of partnership companies, totalled £82.8 million at 31 March 2006.
      This includes a guarantee of £24.3 million, which is supported by
      cash held in escrow to secure the cross-indemnity from partners. The
      value of indemnities issued to financial institutions by the group, in
      order to support the issue of a guarantee by the financial institution
      on behalf of the partnership company, totalled £24.7 million at 31
      March 2006. Guarantees
      totalling £15.5 million relate to the disposal of certain operations
      and reflect the capped value of indemnities issued to the purchaser for pre-completion events. It is anticipated that, in the event of a claim, the group may be able to recover funds from its insurers, although this will depend
  upon the circumstances of the incident giving rise to the claim under the indemnity. The carrying value
of the guarantees discussed above has been £nil for the past two fiscal
years. InflationInflation affects
revenues, operating expenses and interest charges. However, the impact of inflation
has not had a material effect on the groups operating results during the
year. SummaryThe board has reviewed
the business plan and considers that the group has sufficient liquidity to meet
the anticipated financial commitments for the next 12 months. In total, at 31
March 2006, unutilised committed facilities of £450.4 million expiring in more than one year, together with cash and short-term deposits of £1,513.5 million and undrawn funding from EIB of £200
million, provide substantial
pre-funding for the group. ACCOUNTING
    ISSUES International Financial Reporting StandardsThe financial statements for the year ended 31 March 2006 have been prepared in accordance with International Financial Reporting Standards (IFRS). These results, and prior period
comparisons, are consistent with IFRS, with the exception of IAS 39 which, as previously announced, has been applied prospectively from 1 April 2005. Reconciliation between IFRS and UK accounting standards is provided in note 32 of the financial
statements.


CRITICAL
            ACCOUNTING POLICIES The
      group prepares its consolidated financial statements in accordance with
      accounting principles consistent with IFRS as adopted for use in the European
      Union (EU) including International Accounting Standards (IAS) and interpretations
      issued by the International Financial Reporting Interpretation Committee
      (IFRIC), and reconciles its net income, shareholders equity and financial
      position to US GAAP, as shown in the summary of differences between IFRS
      and US GAAP in note 33 of the consolidated financial statements. As such,
      the group is required to make certain estimates, judgements and assumptions
      that it believes are reasonable based upon the information available. These
      estimates and assumptions affect the reported amounts of assets and liabilities
      at the date of the financial statements and the reported amounts of revenue
      and expenses during the periods presented. On
      an ongoing basis, the group evaluates its estimates using historical experience,
      consultation with experts and other methods considered reasonable in the
      particular circumstances. Actual results may differ significantly from
      the estimates, the effect of which is recognised in the period in which
      the facts that give rise to the revision become known. The
      groups accounting policies are detailed in the consolidated financial
      statements. The following paragraphs detail the policies the group believes
      to have the most significant impact on the annual results under IFRS and
      US GAAP. Carrying value of long-lived assetsThe groups accounting policy for property, plant and equipment (PPE) is detailed in the accounting policies section of the consolidated financial statements. The carrying
  value of PPE under IFRS as at 31 March 2006 was £8,543.9 million. Additions to PPE totalled £539.4 million and the depreciation charge was £278.2 million in the year ended 31 March 2006. The estimated useful economic lives of PPE
  are based on managements judgement and experience. When management identifies
  that actual useful lives differ materially from the estimates used to calculate
  depreciation, that charge is adjusted prospectively. Due to the significance
  of PPE investment to the group, variations between actual and estimated useful
  lives could impact operating results both positively and negatively, although
  historically, few changes to estimated useful lives have been required. In accordance with
IFRS and US GAAP, the group is required to evaluate the carrying values of PPE
for impairment whenever circumstances indicate, in managements judgement,
that the carrying value of such assets may not be recoverable. An impairment
review requires management to make subjective judgements concerning the cashflows,
growth rates and discount rates of the cash-generating units under review. Revenue recognitionUnder IFRS, the group recognises revenue generally at the time of delivery and when collection of the resulting receivable is reasonably assured. Should management consider that
the criteria for revenue recognition are not met for a transaction, revenue recognition would be delayed until such time as the transaction becomes fully earned. Payments received in advance of revenue recognition are recorded as deferred revenue.




|United
          Utilities Annual Report & Accounts 2006 | 27
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|                         |  |  |                                     
|------------------------ |  |  | ------------------------------------
|                         |  |  |                                     
|Performance
      review |  |  | Operating
      and financial review
|                         |  |  |                                     



For
      licensed multi-utility operations, the group raises bills and recognises
      revenue in accordance with its entitlement to receive revenue in line with
      the limits established by the periodic regulatory price review processes.
      For water and wastewater customers with water meters, the receivable billed
      is dependent upon the volume supplied including an estimate of the sales
      value of units supplied between the date of the last meter reading and
      the year end. Meters are read on a cyclical basis and the group recognises
      revenue for unbilled amounts based on estimated usage from the last billing
      through to the end of the financial year. The estimated usage is based
      on historic data, judgement and assumptions; actual results could differ
      from these estimates, which would result in operating revenues being adjusted
      in the period that the revision to the estimates is determined. For customers
      who do not have a meter, the receivable billed is dependent upon the rateable
      value of the property, as assessed by an independent rating officer. The
      customers of the electricity distribution business are the electricity
      supply companies that utilise United Utilities Electricitys distribution
      network to distribute electricity from generators to the end consumer.
      The receivable billed is dependent upon the volume of electricity distributed,
      including estimates of the units distributed to customers. The estimated
      usage is based on historic data, judgement and assumptions. Operating revenues
      are gradually adjusted to reflect actual usage in the period over which
      the meters are read. For
      the groups other businesses (infrastructure management and business
      process outsourcing), revenue is recognised in line with activity and performance,
      normally using amounts specified in contractual obligations and when collectability
      is reasonably assured. In general: 
   variable revenues, for example, revenues dependent upon customer volumes in the period, are recognised only when those variable activities are
performed;
   performance incentives are recognised in revenue only to the extent that incentives are reasonably considered to have been earned;
   revenue received in advance of performance is recognised as deferred income. When performance occurs, the deferred income is released and simultaneously
reported as revenue; and
   set-up fees received from clients as contributions to costs are credited to deferred income when received and recognised in revenue (i) as costs are incurred
for fees identified as being against transition costs; or (ii) over the expected life of PPE if the fees are received as a contribution to assets; or (iii) over the period of the contract in line with activity or performance levels for fees not
contractually identified against delivered services. Under US GAAP, the group recognises revenue when (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the sales price
is fixed or determinable; and (iv) collectability is reasonably assured. This difference in approach results in reconciling items for revenue and profit recognition, as further discussed in note 33(i) in the summary of differences between IFRS and
US GAAP in the consolidated financial statements. Under both IFRS and US GAAP, performance-based revenues are recognised only to the extent that the revenues are prudently considered to have been earned at the reporting date. A breakdown
    of revenues by activity is contained in note 1 to the consolidated financial
    statements.


Provision
  for doubtful receivables At each balance
  sheet date, the company and each of its subsidiaries evaluate the collectability
  of trade receivables and record provisions for doubtful receivables based on
  experience. These provisions are based on, amongst other things, comparisons
  of the relative age of accounts and consideration of actual write-off history.
  The actual level of receivables collected may differ from the estimated levels
  of recovery, which could impact operating results positively or negatively.
  As at 31 March
2006, the groups gross trade receivables were £387.0 million and
the provision for doubtful receivables was £155.6
million. Accounting
          for provisions and contingenciesThe
    group is subject to a number of claims incidental to the normal conduct of
    its business, relating to and including commercial, contractual and employment
    matters, which are handled and defended in the ordinary course of business.
    The group routinely assesses the likelihood of any adverse judgements or
    outcomes to these matters as well as ranges of probable and reasonably estimated
    losses. Reasonable estimates involve judgements made by management after
    considering information including notifications, settlements, estimates performed
    by independent parties and legal counsel, available facts, identification
    of other potentially responsible parties and their ability to contribute
    and prior experience. In accordance with IFRS, a provision is recognised
    when it is probable that an obligation exists for which a reliable estimate
    can be made of the obligation after careful analysis of theindividual matter. The required provision may change in the future due to new developments and as additional information becomes available. Matters that either are possible
  obligations or do not meet the recognition criteria for a provision are disclosed, unless the possibility of transferring economic benefits is remote. GoodwillThe
    group records all assets and liabilities acquired in purchase acquisitions,
    including goodwill, at fair value as required by IFRS and US GAAP. Under IFRS
    and US GAAP, goodwill is not amortised but is subject, at a minimum, to annual
    tests for impairment. The initial goodwill recorded and subsequent impairment
    analyses require management to make subjective judgements concerning the fair
    value of cash-generating units. Estimates of fair value are consistent with
    market information and the groups plans and forecasts. Under IFRS, as
    at 31 March 2006, the net carrying value of goodwill was £153.1 million.
    Under US GAAP, the carrying value of goodwill as at 31 March 2006 was £1,019.0
    million. This is substantially higher than that reported under IFRS due to
    a significant amount of goodwill written off directly to reserves under UK
    GAAP prior to the adoption of FRS 10 Goodwill and intangible assets
    and IFRS. Retirement benefitsThe
    group operates two defined benefit schemes, one of which has a defined contribution
    section, which are independent of the groups finances. Actuarial valuations
    of the schemes are carried out as determined by the trustees at intervals
    of not more than three years. Under IFRS, the pension cost under IAS 19 is
    assessed in accordance with the advice of a firm of actuaries based on the
    latest actuarial valuation and assumptions determined by the actuary. The
    assumptions are based on information supplied to the actuary by the company,
    supplemented by discussions between the actuary and management. The assumptions
    are disclosed in note 19 of the consolidated financial statements. Under US
    GAAP, actuarial determinations are required on an annual basis. Additionally
    a different method of calculating the pension cost is required and therefore
    a reconciling item is recorded as discussed in note 33 in the summary of differences
    between IFRS and US GAAP in the consolidated financial statements. Both IFRS
    and US GAAP operating results are affected by the actuarial assumptions used.
    These assumptions include investment returns on the schemes assets,
    discount rates, pay growth and increases to pensions in payment and deferred
    pensions and may differ from actual results due to changing market and economic
    conditions and longer or shorter lives of participants.




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Derivatives
          and borrowingsThe
    groups default treatment is for borrowings to be carried at amortised
    cost, whilst derivatives are recognised separately on the balance sheet at
    fair value with movements in those fair values reflected through the income
    statement. This has the potential to introduce considerable volatility to
    both the income statement and balance sheet. Therefore, for fair value hedges,
    changes in the recognised value of hedged debt that are attributable to the
    hedged risk are adjusted through the income statement. In the case of cashflow
    hedges, movements in the fair value of derivatives are deferred within reserves
    until they can be recycled through the income statement to offset the future
    income statement effect of changes in the hedged risk. In order to apply
    this treatment, it must be demonstrated that the derivative
      has been, and will continue to be, an effective hedge of the hedged risk
      within the debt item. Changes in the fair value of all derivatives are
      recognised in the income statement, except for derivatives that are designated
      and effective in terms of cashflow hedging relationships, in which case
      the gains and losses are deferred in equity. The
    group applies the fair value option through profit or loss where the complexity
    of the swaps means that they are disallowed from being allocated in a hedge
    relationship despite there being significant fair value offset between the
    hedged item and the derivative itself. This
    area is considered to be of significance due to the magnitude of the groups
    level of borrowings.  RESEARCH AND DEVELOPMENT The
    group undertakes research primarily to provide improved standards of service
    to customers, together with continuing improvements in business efficiency.
    Its intention is to strengthen its understanding of science and technology
    in relation to its range of wastewater and water treatment processes to ensure
    that treatment plants are able to meet the required current and future standards
    of environmental performance. The
    aim is to develop new solutions, for example, looking at new processes to
    render waste materials inert and to turn them into saleable products. Research
    is also undertaken into current practices, for example, in relation to health
    concerns about drinking water standards. In addition to these core activities,
    research is also undertaken into sociological and business process issues.
    This work aims to ensure a comprehensive understanding of the interrelationship
    with customers and also benchmark business processes against industry best
    practice. Research
    and development within the groups electricity network aims to deliver
    financial, supply quality, environmental and safety improvements to customers
    and is supported under the Innovation Funding Incentive introduced by Ofgem. The
    group is a member of a number of collaborative research programmes including
    UK Water Industry Research and Water Research Centre, both of which address
    common issues that face the UK water industry. EA Technology Limited provides
    a similar service to the UK electricity distribution industry. The group also
    undertakes company specific projects with these and other research and development
    providers, manufacturers and with universities. Research
    and development expenditure by the group was £1.9 million in the year
    ended 31 March 2006 (2004/05: £0.8 million). Patent
    portfolio managementThe
    group acquires patents in order to provide protection on those ideas and inventions
    which it intends to exploit commercially. Patents are maintained for up to
    20 years. There
    are currently 20 inventions which have patents awarded in several jurisdictions.
    During the year ended 31 March 2006, these 20 active patents generated 31
    patent renewals in 11 countries. No patents were allowed to lapse during the
    year. During
    the year, the company filed applications for four new patents. Two of these
    are to develop further enyzmic hydrolysis in sludge treatment, and the third
    is concerned with the formulation of wastewater sludge for fertilizer application.
    The fourth is concerned with a vandal proof cover.


The
    cost of maintaining patents was less than £50,000 per annum in each
    of the last two years. LicencesUnited
    Utilities grants licences to third parties for the commercial exploitation
    of its patent rights and intellectual property. There are currently seven
    active licence agreements. United Utilities may, as part of the licence, provide
    support to licensees for the purposes of marketing the product or service.




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          Utilities Annual Report & Accounts 2006 | 29
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|Corporate
        responsibility |  |  | Operating
        and financial review
|                                 |  |  |                                       



| | Investment
      in community support
| | -------------------------------------
| | £3.0m                                
| | (2004/05:
      £3.1m)               
| |                                      
| |                                      
| |                                      



The board believes that being responsible in the way it conducts its operations makes sound business sense. Active management on its key environmental, social and economic impacts
helps the group work in a way that is ethical and balances the needs of all of its stakeholders. It enables the group to reduce risk, identify business opportunities, provide stability in its markets, protect resources, make savings, improve
performance and build trust and understanding.  CODE
        OF ETHICS The
    group has adopted a set of business principles which comply with the US Securities
    and Exchange Commissions definition of a code of ethics. It will continue
    to develop them in line with best practice. A free copy of the business principles
    booklet is available upon request from the company secretary, United Utilities
    PLC, Dawson House, Great Sankey, Warrington, Cheshire, England, WA5 3LW or
    may be viewed on the groups website at www.unitedutilities.com. OUR
        APPROACH The
    business principles guide the way the group manages its activities and its
    relationships with stakeholders and set the context for the groups approach
    to corporate responsibility. The
    groups corporate responsibility policies are considered as part of the
    business planning process and performance is a personal objective for each
    member of the executive leadership team (ELT). Members of the ELT meet regularly
    to discuss the key social and environmental issues as determined by identifying
    and prioritising impacts and opportunities. An
    important part of the approach is stakeholder consultation, which provides
    an understanding of the interests and priorities of the different groups of
    people who are affected by the groups activities. Engagement with such
    groups, through various means, provides an appreciation of the areas of the
    groups business that are material to them. This helps the group to target
    where it should place most emphasis in its internal programmes which, in turn,
    drives the reporting process. More information on the groups stakeholder
    approach, identification of key impact areas and detailed information, performance
    data and discussion can be found in the stakeholder report, or on the groups
    website at www.unitedutilities.com. Formal
    management systems cover many of the groups impact areas, including
    environment, health and safety, and quality. Where appropriate, formal certification
    of these systems is sought. Most of the groups operations are covered
    by the ISO 140W accreditation for environmental management. Benchmark exercises
    help to track performance, drive continual improvement and seek out best practice.


KEY
      IMPACT AREAS Regulation and complianceIn
    north west England, United Utilities Water met its compliance standards at
    wastewater treatment works serving 99.6 per cent of the population, a slight
    reduction from last year due to a failure at one of its treatment works. Drinking
    water compliance at customers taps increased again to 99.90 per cent.
    However, pollution incidents have risen slightly to 165 from 147 last year.
    The most serious, category one and two pollution incidents, increased to 23
    from 11 the year before. Convictions fell, with eight prosecutions relating
    to wastewater resulting in fines of £47,500 in the calendar year to
    December 2005, compared to £42,200 in 2004. In
       Scotland, where Contract Solutions operates six wastewater treatments
      works
    on behalf of Scottish Water, compliance was 100 per cent, with no pollution
       incidents or convictions. In Wales, where Contract Solutions is working
      for
    Dwr Cymru Welsh Water, 99.69 per cent of the equivalent population were served
      by compliant works, There were two category two pollution incidents in
      2005/06. Contract
    Solutions met EU water quality targets at its contract in Estonia (Tallinna
    Vesi), 12 months ahead of schedule. In Manila, 95 per cent of the central
    distribution area now has 24-hour water supply. Energy and climate changeUnited
    Utilities is a major user of energy, principally to transport and treat water.
    In 2005/06, the group used 1,019 GWh of electricity and demand is rising to
    meet higher treatment standards. The long-term aim is first to halt, then
    to reverse this increase. The
    group takes steps to improve energy efficiency. For example, three new lower
    emission biogas engines at Davyhulme wastewater treatment works will give
    the site a total generating capacity of 8MW, more than enough for its power
    needs. The group also works with clients, including Dwr Cymru Welsh Water,
    to improve the energy efficiency of their operations. The group has set up
    a carbon management forum, chaired by Gordon Waters, managing director of
    Contract Solutions and a member of the board of the Carbon Trust. It is hoped
    that the forum will bring greater focus to the groups work to manage
    its carbon emissions. Leakage and water efficiencyIn
    north west England, United Utilities Water has halved water leakage since
    1995 and met its spot target of 470 MI per day at the end of 2005/06. The
    next challenge is to maintain this performance during the year ahead. The
    group promotes water efficiency among its domestic and business customers,
    and contributes to research to improve the efficiency of water appliances.




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|United
         Utilities ranking in BitCsCorporate Responsibility Index=17th |  | During
       the year, United Utilities improved its score in Business in the Communitys
       CorporateResponsibility
           Index. It was ranked 17th in the Corporate Responsibility Index and
       remains in the Premier League of the Environment index. |  | The
       groups approach is also recognised through its inclusion in the
       FTSE4Good Index
    (at global, European and UK levels).
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Waste managementThe
  groups main waste streams are sludges from both wastewater and water
  treatment and spoil from excavation. Almost 90 per cent of wastewater sludge
  is recycled to agricultural land or used for restoration and reclamation. The
  groups new enzymic hydrolysis process, which accelerates natural bacteriological
  processes and converts up to 80 per cent of organic material into biogas, is
  now being deployed at four wastewater treatment sites. The Sheepscar recycling plant, which is operated on behalf of Northern Gas Networks,
receives excavated material from gas mains repair and replacement in south Yorkshire.
The plant screens and crushes material, then blends it to make material to backfill
excavation. Land management and rural issuesBiodiversity
action plans are in place for utility operations in north west England and Wales,
where the group owns or has significant management control over land and
assets. United Utilities North West has completed one year of its five-year innovative
Sustainable Catchment Management Programme on the Bowland and Southern estate
areas. The £10 million programme seeks to improve the condition of our
ecologically important
land, enhance biodiversity and improve raw water quality. Sustainable supply chainThe
group aims to instil consistent values and standards of service throughout the
supply chain. The group-wide procurement policy requires the environmental and
social impacts
of
the groups buying decisions to be considered. The policy was strengthened
during the year by a programme of workshops and research into best practice. Health and safetyThe
group aims for continual improvement in its health and safety performance. Common
management standards are being implemented across the group. The business-wide
health and safety management framework will be completed in September 2006. Further
details of our safety performance in the year can be found on page 14. Education and trainingNow
in its third
year, the Grow Your Future Workforce programme in north west England
continues to inspire young people to pursue a career in electrical engineering,
an important area of work for the group where there is currently a skills shortage.
In 2005, United Utilities took operational responsibility for gas mains on behalf
of Northern Gas Networks and immediately ended a ten-year gas industry training
gap by recruiting 17 new apprentices from almost 500 applicants from across the
north
east and Yorkshire.


Children from ages
seven to 16 are taught at the groups four major education centres in north
west England. The programme reaches customers of the future and inspires potential
employees. 11,473 pupils visited the centres last year. Electricity education
classes are delivered at the electricity classroom or by United Utilities
mobile electricity tutors. DiversityParts
of the business still fail to reflect the diversity of society as a whole. During
the year, the board approved a diversity strategy. Key actions include monitoring
recruitment and selection procedures, benchmarking performance against other
major companies, implementing workplace policies which support flexible working,
and carrying out equal pay reviews. Customer serviceThe
group has carried out a management development programme in its call centres
and invested in the development of a tailored National Vocational Qualification
in customer service. Weekend appointments to read customer meters and two-hour
time slots for home visits are other innovations. A 24-hour automated balance
enquiry and payments line and improved website make it easier to transact with
us outside call centre
opening hours. Debt and chargingAffordability
of water bills is a growing problem which the industry has discussed with government,
the Consumer Council for Water and industry regulators. The long-term solution
to the issue rests with government. In the meantime, the group is taking steps
to help customers in serious financial hardship. It is providing £15 million
to support the independent United Utilities Trust Fund which came into operation
on 1 April 2005. In its first full year of operation, 2,000 customers received
a total £1.55
million to help with their water bills. Community supportThe
group supports community activity, investing its resources in partnerships and
projects where it can share benefits with local communities. Support includes
financial assistance
as well as employee time and in-kind help. In 2005/06, some £3.0 million
was spent, around 0.7 per cent of group profits. Most community investment is
made as part of ongoing relationships the business has with a wide range of community
stakeholders. Programmes include work on environmental, education, skills and
training and employment initiatives, as well as local support for community activities.
The group also has corporate relationships with Groundwork UK, WaterAid and the
Royal Society for the Protection of Birds and supports many charitable giving
and volunteering schemes.




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|Risk
        management |  | Operating
        and financial review
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CAUTIONARY
          STATEMENT REGARDING 
FORWARD-LOOKING STATEMENTS This report contains certain forward-looking statements with respect to the financial
condition, results of operations and business of the group. Statements that
are not historical facts, including statements about the boards beliefs
and expectations, are forward-looking statements. Words such as expects, anticipates, intends, plans, believes, seeks, estimates, potential, reasonably
possible, targets and variations of these words and similar
expressions are intended to identify forward-looking statements within the meaning
of the US Private Securities Litigation Reform Act 1995. These statements are
based on current plans, estimates and projections, and therefore investors should
not rely on them. Forward-looking statements speak only as of the date they are
made, and the company undertakes no obligation to update publicly any of them
in light
of new information or future events. The company may also make written and/or oral forward-looking statements in its
periodic reports to the Securities and Exchange Commission on Form 6-K, in the
annual report to shareholders, in proxy statements, in offering circulars and
prospectuses, in press releases and other written materials and in oral statements
made by officers, directors or employees to third parties, including financial
analysts. Forward-looking statements involve inherent risks and uncertainties. The company
cautions investors that a number of important factors could cause actual results
to differ materially from those anticipated or implied in any forward-looking
statements. These factors include: (i) the effect of, and changes in, regulation
and government policy; (ii) the effects of competition and price pressures; (iii)
the ability of the company to achieve cost savings and operational synergies;
(iv) the ability of the company to service its future operations and capital
requirements; (v) the timely development and acceptance of new products and services
by the company;
(vi) the
effect of technological changes; and (vii) the companys success in managing
the risks of the foregoing. The company cautions that the foregoing list of important
factors does not address all the factors that could cause results to differ
materially.  RISK
      FACTORS In addition to the risks identified in other information included in this report,
investors should consider the risks detailed in this section. There may be additional
risks that the group does not currently know of, or that are currently deemed
immaterial
based on information currently available. The groups business, financial
condition or results of operations could be materially affected by any of these
risks,
resulting in a decline in the trading price of the groups ordinary shares
or ADSs. The group operates an internal control system to evaluate and manage
risks as described in the section Internal control on pages 59 and
60. Revenue
of the groups regulated businesses is substantially influenced by regulators,
which could adversely affect profitabilityThe
revenue and
profitability of the groups water, wastewater and electricity distribution
businesses (the regulated businesses) are substantially influenced by price limits
established every five years by the respective regulators. Price reviews for
the regulated


businesses covering the five-year period commencing on 1 April 2005 were determined
by the electricity regulator in November 2004 and by the water regulator in December
2004. The group has accepted both of these determinations and has not exercised
its right to appeal adverse price determinations to the Competition Commission. An adverse price determination may occur as a result of a number of factors,
including an inadequate allowed cost of capital or unrealistic regulatory assumptions
concerning
operating expenses, required capital expenditure and revenue forecasts. Scope to re-open these price controls within the charging period is limited.
In the case of the water and wastewater business, there are provisions for Interim
Determinations
of K
(IDoK) and the application of the shipwreck clause. There
is no equivalent provision that allows for the re-opening of electricity distribution
price limits, although specific re-opening provisions have been made, with effect
from 1 April 2005, in relation to uncertain costs associated with specified provisions
of the Electricity Safety, Quality and Continuity Regulations 2002 (or amending/
replacement regulations), the New Roads and Street Works Act 1991 and the Traffic
Management Act 2004. Failure to deliver the capital investment programmes could adversely affect profitabilityUnited
Utilities regulated businesses require significant capital expenditure
for additions to, or replacement of, plant and equipment for their wastewater,
water and electricity distribution facilities and networks. The price limits
set by the respective regulators take into account the level of capital expenditure
expected to be incurred during the relevant five-year price review period and
the associated funding costs. Historically, the group has financed the expenditures
from cash flows from operations and from debt financing. There can be no assurance
that cash flows from operations will not decline, or that additional debt financing
or other
sources of capital will be available to meet these requirements. If the group is unable to deliver the capital programme at expected expenditure
levels or is unable to secure the expected capital efficiencies associated with
the capital programme or the programme falls behind schedule for other reasons,
the groups profitability may suffer. The regulators may factor such failure
into future price reviews. In addition, the groups ability to meet regulatory
and environmental performance standards could be adversely affected by such failure,
which may result in fines or other sanctions. The group is currently in discussions with Ofwat and theEnvironment
Agency in relation to the scope of works required in order to complete that part
of its capital programme for the last charging period (i.e. 2000-05) which related
to limiting pollution from storm water overflows (referred to by the Environment
Agency as Unsatisfactory Intermittent Discharges (UIDs)).
This means that some of these works are being delayed until the required scope
is determined. Once the cost of the scope of works is finally determined, it
may be more than the amounts that have been allowed for by Ofwat in the 1999
and 2004 price reviews. In such cases the company will seek to process the resulting
changes
through Ofwats protocol for dealing with changes to the regulatory contract
(the change protocol). In respect of those UIDs which were the subject
of the companys 2003 interim determination, Ofwat has stated that additional
costs of completing
these works will be recoverable




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through
    future price reviews provided that they meet Ofwats conditions for recovery
    under the change protocol. In respect of the UIDs which were not dealt with
    in the 2003 interim determination, Ofwat has given a similar confirmation in
    relation to those which the company considers present the greatest risk of
    significantly exceeding the costs assumed in the 1999 price review. The group
    cannot be certain, however,
  that all these additional costs will be recoverable on this basis and will not
    adversely affect its profitability or financial position. Failure to deliver operational performance or cost savings implicit in the regulatory reviews could adversely affect profitabilityOperating
cost savings to be achieved during the current five-year regulatory period are
implicit in the regulatory reviews. To assist the achievement of these operating
cost savings a business change programme is underway. If the operating cost savings
are not achieved, or the business change programme is not delivered, then the
groups profitability would suffer. Similarly, if operational performance
was to deteriorate, this may be reflected by less favourable outcomes from future
price reviews and the groups
profitability would suffer. Environmental
regulations could increase the groups costs and adversely affect profitabilityVarious
government environmental protection and health and safety laws and regulations
govern the wastewater, water and electricity distribution businesses. These laws
and regulations establish, amongst other things, standards for drinking water,
discharges into the environment and quality of electricity supply, which affect
the groups operations. In addition, the group is required to obtain various
environmental permissions from regulatory agencies for its operations. The group
endeavours to comply with all regulatory standards. However, historically the
group has not been in total compliance and cannot guarantee in the future that
it will be in total compliance at all times with these laws and regulations.
Should the group fail to comply, it would face fines imposed by the courts or
otherwise
face sanction by the regulators. Environmental laws and regulations are complex and change frequently. These laws,
and their enforcement, have tended to become more stringent over time. Whilst
management believes it has taken into account the future capital and operating
expenditures necessary to achieve and maintain compliance with current and known
future changes in laws and regulations, it is possible that new or stricter standards
could be imposed, or current interpretation of existing legislation amended,
which will increase the
groups operating costs by requiring changes or modifications to the assets
in order to comply with any new environmental laws and regulations. Although
these costs may be recoverable in part through the regulatory process of setting
appropriate future price limits, there can be no assurance of this. Therefore,
the group cannot guarantee that the costs of complying with, or discharging its
liabilities under, current and future environmental and health and safety laws
will not adversely
affect its profitability or financial position. Service interruptions or contamination to water supplies could adversely affect profitabilityIn
addition to
the capital investment programmes, United Utilities regulated businesses
control and operate water, wastewater and electricity networks and undertake
maintenance of the associated assets with the objective of providing a continuous


service. Historically, there have been interruptions to the supply of services
such as the incident in January 2005 affecting Cumbria and Lancashire in north
west England, when a storm severely damaged the electricity network supply to
250,000 customers, but the majority of interruptions relate to minor issues that
are rectified promptly. However, the failure of a key asset could cause a more
significant interruption to the supply of services (in terms of duration or number
of customers affected), which
may have an adverse effect on the groups operating results or financial
position. Water supplies may be subject to contamination, including contamination from
the development of naturally occurring compounds and pollution from man-made
sources. In the event that water supply is contaminated and the group is unable
to substitute water supply from an uncontaminated water source, or to treat adequately
the contaminated water source in a cost-effective manner, there may be an adverse
effect on the groups operating results or financial position. The group
could also be held liable for human exposure to hazardous substances in its water
supplies or other environmental
damage. It is possible that some of the costs associated with service interruptions or
contaminations may be partly recoverable through the shipwreck clause or future
price reviews. The group maintains insurance policies in relation to legal liabilities
likely to be associated with these risks, although there can be no assurance
that all costs of any such claims would be covered or that coverage will continue
to be available in the
future. Non-recovery of customer debt could adversely affect profitabilityUnited
Utilities North West manages the billing, cash collection and debt management
activities for 3.1 million domestic and business wastewater and water customers.
The Water Industry Act 1991 (as amended by the Water Industry Act 1999) prohibits
the disconnection of a water supply for non-payment and the limiting of a supply
with the intention of enforcing payment for certain premises including domestic
dwellings. Non-recovery of debt is therefore a risk to the group and may cause
the groups profitability to suffer, although allowance is made by the water
regulator in the price limits at each price review for a proportion of debt deemed
to be irrecoverable. In addition, the group can also request a re-setting of
its price limits through an IDoK during a review period when costs or savings
arising from changes in certain regulatory assumptions (including as to the level
of non-recoverable debt) are material, although there can be no guarantee that
an IDoK application will be successful. Although new and existing strategies
continue to be implemented to reduce cash collection risks, including targeted
summonsing, there can be no assurance that the group will not suffer losses from
the groups inability
to recover its debts fully. Rapid growth in the business process outsourcing and infrastructure management sectors exposes the group to execution risk; conversely, slow growth could
adversely affect profitabilityThrough
Vertex,
the groups activities in business process outsourcing are expanding into
new markets and territories and achieving increased sales external to the group
(2006: £301 million; 2005: £308 million). The infrastructure management
business, United Utilities Contract Solutions, is also expanding into new markets.
The delivery of contracts, both existing and future, will be achieved by exploiting
the groups core infrastructure management and business process
outsourcing




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|Risk management continued |  |  | Operating
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skills. In addition, Vertex has significantly expanded its operations into financial
services with the acquisition of Marlborough Stirling Group plc. This rapid growth
exposes these businesses to new business and transaction risks and, potentially,
the risk of overtrading, whereby the businesses are unable to operate all their
contracts to the standard required by their clients due to a lack of resources
and suitably qualified personnel. Overtrading could lead to a loss of customers
which, in turn, may cause profitability to suffer. Slower than expected expansion
could also impact profitability. Pension scheme obligations may require the group to make additional contributions
to
the schemes which would reduce profitabilityThe
group participates in a number of pension schemes, principally in the UK. The
principal schemes are funded defined benefit schemes and the assets of the
schemes are held in trust funds independent of group finances. The group increased
pension contribution rates to the United Utilities Pension Scheme and the United
Utilities Group of the Electricity Supply Pension Scheme in 2003/04 and the results
of the full actuarial valuation resulted in further increases being required
to the United Utilities Pension Scheme and the United Utilities Group of the
Electricity Supply Pension Scheme from 1 April 2005. A one-off lump sum contribution
of £320 million was made on 31 March 2005. This contribution was calculated
to equal the capitalised value of the groups funding obligations to the
schemes for the next five years (based on the actuarial valuation as at 31 March
2004) and represents advance payment of certain employer contributions which
would have been made to the schemes during that period. As a consequence the
schemes were estimated to have a combined post-tax surplus of £13.5 million
as at 31 March 2006, compared to a post-tax
obligation of £59.2 million at 31 March 2005. However, the group continues
to monitor the funding of the schemes and cannot guarantee that during the next
five years further contributions will not be required to eliminate continuing
shortfalls in the schemes. This may adversely affect the financial position of
the group. Should long-term investment returns remain lower than the rate assumed
by the actuaries in their pension scheme valuations, or interest rates reduce
further leading to an increased deficit, the profitability of the group may be
further adversely affected and the group required to increase its contributions
to eliminate this under-funding. Currently, anticipated future pensions contributions
and a proportion of existing pension scheme deficits are recoverable through
the price limits established
by the regulators. Operating riskManaging
the groups businesses is dependent upon the ability to process
a large number of transactions efficiently and accurately. Operational risk and
losses can result from fraud, employee errors, failure to properly document transactions
or to obtain proper internal authorisation, failure to comply with regulatory
requirements and business principles, resource shortages, equipment failures,
natural disasters or the failure of external systems. Although the group has
implemented risk controls and loss mitigation actions, and substantial resources
are devoted to developing efficient procedures and to staff training, it is only
possible to be reasonably, but not absolutely, certain that such procedures will
be effective in controlling
each of the operational risks faced by the group.


LITIGATION NOSS
    Consortium
(NOSS), of which North West Water International Limited (NWWIL),
a wholly owned subsidiary of the company, is a member and the sole remaining
active participant, is party to arbitration proceedings in Thailand in relation
to a design and construction contract dated 1 November 1993 between NOSS and
the Bangkok Metropolitan Administration (BMA) to build a wastewater
treatment plant and network in central Bangkok. Following disagreements with
the engineer and a dispute with BMA, NOSS rescinded the contract and in November
1997 served a notice under Section 387 of the Thai Civil and Commercial Code
on the BMA. In March 1998, NOSS terminated the contract and served notice of
arbitration. NOSS has total claims against the BMA of approximately 6 billion
Baht (approximately £83 million). The BMA has counter-claimed for approximately
3.2 billion Baht
(approximately £44 million). Arbitrators have been appointed by each party,
but the arbitration process has stalled following the arbitrators failure
to agree on the appointment of a third arbitrator. NOSS will continue to monitor
the
situation, but presently no hearings are scheduled. Save as stated above, neither the company nor any member of its group is, or
has been, involved in any legal or arbitration proceedings nor, as far as the
directors are aware, are any such proceedings pending or threatened by or against
any member of the group which may have, or have had within the previous 12 months,
a significant
effect on the groups financial position. The company is engaged in litigation in the ordinary course of its operations,
such as contract disputes, disputes over easements/wayleaves and other similar
property matters,
bill
collections, personal injury claims and workers compensation claims. The
company does not believe that such litigation, either individually or in aggregate,
is material. The company maintains insurance and, to the extent that the amounts
in dispute may not be covered by such insurance, maintains provisions in those
situations where management deems it appropriate in accordance with IFRS.




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|Directors and senior managers |  |  | Governance
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The business of the company is managed by the board of directors. There are no
family relationships between any of the directors or senior managers. There are
no arrangements or understandings with major shareholders, customers, suppliers
or others pursuant to which any of the persons referred to below was selected
as a director or member of senior management. Reappointment of directorsUnder the articles of association, a director appointed by the board to fill
a casual vacancy must retire at the annual general meeting of the company next
following such appointment. Philip Green was appointed as an additional director
by the board on 20 February 2006 and he was appointed as the chief executive
officer on 31 March 2006. Paul Heiden was appointed as an additional director
on 5 October 2005. They are therefore retiring and offering themselves, and the
board is recommending them, for reappointment at the 2006 annual general meeting. In addition, the articles of association provide that if, at the start of business
on the date of the notice convening that annual general meeting, a director has
served for a continuous period of nine years he must retire and may offer himself
for reappointment.
Sir Peter Middleton will have completed over nine years service at the
date of notice and is therefore retiring and offering himself for reappointment
at
the 2006 annual general meeting. The articles of association also state that a director must retire at the third
annual general meeting following his or her last appointment. Gordon Waters was
last appointed at the annual general meeting held in 2003 and is therefore retiring
and is offering himself for reappointment at the 2006 annual general meeting. Jane Newell, having
completed nine years service, will stand down at the annual general meeting
in 2006 and she will not seek reappointment. Simon Batey will be leaving the
company after the annual general meeting and, therefore, he will not seek reappointment. Executive directorsPhilip
Green (age 53)  Chief executive officerPhilip
Green was appointed as a director on 20 February 2006 and he succeeded John Roberts,
who retired on 31 March 2006, as the chief executive officer. In
his most recent role before joining the company, he led the container shipping
company Royal
P&O Nedlloyd through its successful listing in 2004 and subsequent agreed
acquisition by AP Moller-Maersk A/S, delivering significant value for shareholders.
Prior to that, he was a main board director and chief operating officer at the
global information company Reuters Group PLC, overseeing significant restructuring,
cost reduction and customer service improvements. From 1990 to 1999 he was at
DHL, the global market leader for cross-border express delivery, becoming chief
operating officer for
Europe and Africa in 1994.


Simon
Batey (age 52)  Chief financial officerSimon
Batey joined the board as the chief financial officer on1
April 2000. He had previously been group finance director of AMEC plc from 1992
and prior to that deputy finance director. He was closely involved in the
reshaping of that group through a number of major investments and disposals and
the development of its policy towards private finance initiatives. He also served
on the boards of Fairclough Homes Group Limited and the major French electrical
contractor SPIE SA. He was appointed as a non-executive director of THUS Group
plc on 26 February 2006 and he is also a non-executive director of Arriva plc.
After graduating from Oxford
University, Simon joined Armitage & Norton (now part of KPMG) where he trained
and
qualified as a chartered accountant. Charlie
Cornish (age 46)  Managing director,
United Utilities North WestCharlie
Cornish
is responsible for the groups regulated asset management business. He joined
the group in January 2004 and was formally appointed to the board on 27 January
2004. After graduating from Strathclyde University, he worked for British Aerospace,
Plessey Telecommunications and Associated British Foods and also served as an
executive director of NHS trusts. In 1998, he joined the West of Scotland Water
Authority as human resources director and was involved with major change programmes.
He went on to become its customer services director and later chief executive.
He joined Thames Water in 2002 as global business performance director, working
across Europe, Asia/Pacific and the Americas, eventually becoming chief operating
officer with Thames Water UK and Ireland with responsibility for service delivery,
including operations and capital programmes. He is chairman of Young Enterprise
North West and was appointed to the board of Water UK in March 2006. He was a
director of Young Enterprise UK until February 2006. Tom
Drury (age 44)  Managing director, VertexTom
Drury joined the board as an executive director on9
May 2005. He began his career with Unilever before joining PricewaterhouseCoopers
where he became a management consultant, specialising in financial management,
activity-based costing and business planning. He joined United Utilities Water
in 1991 and became finance director in 1992. He moved to Vertex as managing director
when it was set up in 1996 and has successfully guided the company from being
essentially an in-house provider of customer management services to its current
position as
one of the UKs largest providers of business process outsourcing. Gordon
Waters (age 58)  Managing director,
United Utilities Contract SolutionsGordon
Waters is
responsible for the groups infrastructure management business. He joined
the group in 1996, and was appointed to the board on 1 June 1997. A qualified
civil engineer and structural engineer, he graduated from the City University
London in 1969. He joined a major UK consulting engineering practice before working
for a number of major UK construction companies. From 1987 to 1996, he worked
for Tarmac Construction Limited, becoming managing director of the civil engineering
division in 1992, and joining the board of Tarmac Construction Limited in 1993.
He was responsible for all their major projects and regional civil engineering
companies and specialist companies both in the UK and overseas. He is a non-executive
director
of The Carbon Trust.




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Non-executive directorsSir
Richard Evans (age 63)  ChairmanSir Richard Evans was appointed a non-executive director on1 September 1997 and chairman in January 2001. He joined the Military Aircraft
Division of British Aircraft Corporation (BAC) and in 1978, he was promoted to
commercial director of what had then become the Warton Division of the then British
Aircraft Corporation. He was appointed deputy managing director of the newly
formed British Aerospace Military Aircraft Division in 1986. In January 1987,
he was appointed to the board of British Aerospace plc as marketing director
and became chief executive in 1990. He was also a director of the Airbus company.
He was appointed chairman of British Aerospace plc (now BAE Systems plc) in May
1998, a post from which he retired in July 2004, after more than 30 years with
the company (and its predecessors). He was also a non-executive director of NatWest
plc from 1998 to 2000. Norman
Broadhurst (age 64)  Chairman of the audit committeeNorman Broadhurst was appointed as a non-executive director on 1 April 1999 and
is chairman of the audit committee. He is currently chairman of Chloride Group
plc and Freightliner Ltd. On 11 May 2006 he became chairman of Cattles plc. He
is also a non-executive of Old Mutual plc and on 22 May 2006 he retired as a
non-executive from the board of Tomkins plc. He was group finance director of
Railtrack plc from 1994 to
2000. David
Jones CBE (age 64)  Non-executive directorDavid Jones CBE was appointed as a non-executive director on 3 January 2005.
He is currently chairman of UK Coal PLC and is also chairman of Teesside Power
Ltd. He was the group chief executive of The National Grid Company plc from 1994
to 2001 taking National Grid to the stock market and leading it successfully
through an extensive business transformation programme. Prior to that, he was
chief executive of South Wales Electricity, having previously held senior engineering,
commercial and management posts on the South Western and Midlands Electricity
Boards. Paul
Heiden (age 49)  Non-executive directorPaul Heiden was appointed as a non-executive director on5
October 2005. He has been the chief executive of FKI plc since 2003. From 1992,
he held various senior management positions at Rolls-Royce plc prior to joining
the board in 1997 as director of Industrial Businesses and being appointed group
finance director in 1999. After qualifying as a chartered accountant at Peat
Marwick Mitchell & Co, he worked in senior finance roles at Hanson PLC and
Mercury Communications. He was a non-executive director of Bunzl plc from 1998
to 2005 and was a non-executive
director of Filtrona plc from 2005 to 2006.


Sir
Peter Middleton (age 72)  Deputy chairman and senior independent non-executive
directorSir
Peter Middleton joined the board as a non-executive director in January 1994.
He is chairman of Camelot Group plc, the operator of the National Lottery, president
of the
British Bankers Association, chairman of the Barclays Group Asia Pacific
Advisory Committee, chairman of the Centre for Effective Dispute Resolution,
chairman of Marsh Ltd, chairman of Creative Sheffield, chancellor of the University
of Sheffield and is on the boards of the National Institute of Economic and Social
Research and Mobile TeleSystems (MTS) OJSC. He is also a member of the Advisory
Boards of Marsh McLennan companies, Financial Dynamics and Sistema. After National
Service, he joined HM Treasury where he had a long and distinguished career spanning
30 years, ultimately ascending to become permanent secretary from 1983 to 1991.
Sir Peter joined Barclays in 1991 as group deputy chairman and as executive chairman
of BZW, became chairman of Barclays Capital following the reorganisation of BZW
in October 1997 and was group chief executive from November 1998 until October
1999. He became group chairman of Barclays Bank PLC in April 1999 and retired
in August
2004. Jane
Newell OBE (age 62)  Non-executive directorJane
Newell joined the board as a non-executive director on 1 September 1996. After
10 years as an international civil servant, she joined the Liverpool School
of Tropical Medicine, and became chairman of its Council from 1995 to 1997. In
1992, she was appointed founder trustee and subsequently chairman of the Maxwell
Pensioners Trust and in 1997 received the OBE for this work. She is chairman
of DSGi Group Pension Scheme, an external assessor for the Home Office for promotions
in the police, prison and fire services, pro-chancellor and chairman of the board
of governors of London South Bank University and a Justice of the Peace. In March
2005, she stood down as chairman of the trustee companies responsible for the
United Utilities pension schemes following her appointment as chairman
of the trustee company to the Royal Mail Pension Plan, one of the largest funds
in the UK. Andrew
Pinder CBE (age 59)  Non-executive directorAndrew Pinder was appointed a non-executive director on1 September 2001. As the e-Envoy to the UK government from 2000 to 2004, he was
responsible to the Prime Minister for the delivery of internet access to all
British citizens and businesses. He joined the board of Entrust, a US-based security
specialist, in November 2004 and he became an independent non-executive director
of Spring Group plc in March 2005. In 2005 he became a member of the Intel Global
Advisory Board and in January 2006, he became Chairman of Becta (British Educational
Communications and Technology Agency), an agency of the DfES, which looks after
IT in schools and further education. Before his appointment as e-Envoy, he was
a partner in a venture capital firm and carried out a number of management consultancy
assignments for the British government. Previous executive leadership roles also
include positions as the head of European operations and technology at Citibank,
director of operations and technology at Prudential Corporation and as director
of information technology at the Office of Inland Revenue.




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Nick
  Salmon (age 53)  Non-executive directorNick
  Salmon was appointed as a non-executive director on 4 April 2005. He has been
  the chief executive of Cookson Group plc since 2004. From 2001 to 2004, he was
  executive vice president of Alstom S.A., the global energy and transport infrastructure
  group. From 1997 to 2001 he was executive vice president of ABB Alstom Power
  and was chief executive of Babcock International Group PLC from 1993 to 1997.
  Prior to joining Babcock, he held senior management positions at GEC and GEC
  Alsthom in the UK and France, and previously spent 11 years with China Light
  & Power Company Limited in Hong Kong. Senior
  managersThe
  following are the senior managers of the company who are not board directors,
  but together with the executive directors above, form the executive leadership
  team: Linda
  Booth (age 53)  Group human resources directorLinda
  Booth joined the group as human resources director of Your Communications Limited
  on 4 October 1999. She was appointed as group human resources director on 1
  January 2003. She is a non-executive director of Ufi Limited which is improving
  skills for work via Learndirect. She also chairs the steering committee of Grow
  Your Future Workforce which is a partnership between United Utilities and Scottish
  Power, funded by the North West Development Agency to address engineering skills
  shortages. Tim
  Rayner (age 45)  Company secretaryA
  solicitor and previously a partner with a predecessor law firm of Addleshaw
  Goddard, Tim Rayner joined the group as group legal manager in 1995. He was
  appointed as group company secretary on 1 April 1998. Other
  executive leadership team members who served during the year included Tom Drury,
  who was appointed to the board on 9 May 2005, Hugh Logan, who transferred to
  THUS Group plc on 26 February 2006 and Ian Priestner, who left the company on
  30 April 2006.




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|Directors
      report |  |  | Governance
|                        |  |  |           



Principal
  activitiesThe
  company is the holding company of a group which manages and operates electricity
  distribution, water and wastewater assets and also manages infrastructure and
  business processes for its own and other businesses. A fuller
  description of business activities is contained within the operating and financial
  review on pages 4 to 15. The principal subsidiary undertakings and joint ventures
  of the company are shown in note 13 to the consolidated financial statements. Business
  reviewThe
  chairmans and chief executives reviews on pages 2 and 3 and the
  operating and financial review on pages 4 to 34 report on the groups activities
  during the year and on likely future developments. A summary of key performance
  indicators can be found on the inside cover. The directors, in preparing the
  operating and financial review, have not sought to comply with the ASBs
  2006 Reporting Statement on operating and financial reviews. The
  dividend for shareholdersThe
  directors are recommending a final dividend of 29.58 pence for each ordinary
  share for the year ended 31 March 2006, making a total for the year of 43.87
  pence for each ordinary share. Subject to shareholders approving this recommendation
  at the annual general meeting, the dividend will be paid on 25 August 2006 to
  shareholders on the register at the close of business on 30 June 2006. The
  business for the annual general meetingDetails
  of the resolutions to be proposed at the 2006 annual general meeting are set
  out in the notice calling the meeting. There is also a full explanation of the
  resolutions in the leaflet containing the notice, enclosed with this report. EmployeesThe
  companys policies on employment of disabled persons and on employee involvement
  are contained within the operating and financial review on pages 13 and 14.
  The policy to encourage employee involvement through provision of share schemes
  is discussed within the directors remuneration report on page 41. Directors
  and senior managementThe
  names of the present directors and their biographical details are given on pages
  35 to 37, together with details of the senior managers who, with the executive
  directors, form part of the executive leadership team but are not board members.
  The following also served during the period: 
    John
      Roberts  retired from the board as the chief executive officer on
      31 March 2006;
    John
      Seed  retired from the board as a non-executive director on 29 July
      2005;
    Hugh
      Logan  a member of the executive leadership team transferred to THUS
      Group plc on 26 February 2006; and
    Ian
      Priestner  a member of the executive leadership team left the company
      on 30 April 2006.


Directors
  and senior managers interests in sharesThe
  directors and their immediate families had the following interests in shares
  as at 31 March 2006 and as at 31 May 2006, all of which were beneficial interests,
  in the companys ordinary shares and options to subscribe for shares. None
  of the directors or senior managers hold more than one per cent of the ordinary
  share capital of the company. Except as described below, none of the directors
  had any interest in any share capital of any other group company or in any debenture
  of any group company. 1.
  Interests in ordinary sharesAs
  at 31 May 2006, the directors and senior managers (15 persons) of United Utilities
  held a total of 393,341 ordinary shares in the company, representing 0.04 per
  cent of the issued ordinary share capital. The individual interests of the directors
  in ordinary shares are shown in table 14. Table
  14: At
      1 April 2005or
      date of
    
    At
    
    Atappointment
    
    31
      March
    
    31
      Mayif
      later
    *
    2006
    
    2006A
      shares
    
    Ordinary
    
    Ordinary
    
    OrdinaryPhilip
      Green*
    n/a
    
    100,000
    
    100,000
    
    100,289John
      Roberts
    40,222
    
    110,199
    
    191,219
    
    n/aSimon
      Batey
    44,127
    
    82,401
    
    126,802
    
    126,848Charlie
      Cornish
    
    
    46
    
    321
    
    367Tom
      Drury*
    5,323
    
    20,123
    
    22,426
    
    22,426Gordon
      Waters
    7,253
    
    44,276
    
    73,380
    
    73,426Sir
      Richard Evans
    136
    
    245
    
    381
    
    381Norman
      Broadhurst
    189
    
    341
    
    530
    
    530David
      Jones
    
    
    
    
    
    
    Paul
      Heiden*
    n/a
    
    
    
    1,852
    
    1,852Sir
      Peter Middleton
    2,541
    
    4,574
    
    7,115
    
    7,115Jane
      Newell
    2,419
    
    4,356
    
    6,775
    
    6,775Andrew
      Pinder
    2,222
    
    4,000
    
    6,222
    
    6,222Nick
      Salmon*
    
    
    
    
    
    
     Notes:
    The
      amounts held at 31 March 2006 include those shares purchased by way of the
      second stage of the two-stage rights issue of one further A share for each
      A share held on 2 June 2005 at 165p per further A share. On 6 July 2005
      all the A shares were converted into ordinary shares at a rate of two for
      one.
    Each
      executive director is a member of the class of discretionary beneficiaries
      of the United Utilities Employee Share Trust and is therefore treated as
      having an interest in the 52,500 ordinary shares held by United Utilities
      Employee Share Trust Limited as trustee of the United Utilities Employee
      Share Trust at 31 March 2006. As at 31 May 2006, United Utilities Employee
      Share Trust Limited continued to hold 52,500 ordinary shares.
    Tom
      Drury was appointed as a director on 9 May 2005.
    Nick
      Salmon was appointed as a director on 4 April 2005.
    John
      Seed retired as a non-executive director on 29 July 2005.
    Paul
      Heiden was appointed as a non-executive director on 5 October 2005.
    John
      Roberts retired as the chief executive officer and as a director on 31 March
      2006.
    Philip
      Green was appointed as a director on 20 February 2005 and as the chief executive
      officer on 31 March 2006.
    Provided
      Philip Green maintains his shareholding of 100,000 shares and remains in
      employment with the company throughout the next five years, United Utilities
      has agreed to match this investment on a one-for-one basis, thereby aligning
      his interests with those of the companys other shareholders. These
      matched shares, together with additional shares from notional reinvestment
      of dividends, will transfer to Mr Green at the end of the five-year period,
      after the conclusion of the next regulatory reviews.




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2.
  Interests in share optionsAs
  at 31 May 2006, the directors and senior managers (15 persons) of United Utilities
  held options to purchase 7,983 ordinary shares in the company, representing
  0.001 per cent of the issued ordinary share capital, all of which were issued
  pursuant to the United Utilities all-employee ShareSave scheme, the company
  share option scheme 1999 or its forerunner, the executive share option scheme.
  The individual interests of the directors in share options are shown in table
  15. Table
  15: At
      1 April 2005or
      date of
    
    At
    
    Atappointment
    
    31
      March
    
    31
      Mayif
      later
    *
    2006
    
    2006Philip
      Green*
    
    
    
    
    John
      Roberts
    
    
    
    
    n/aSimon
      Batey
    1,751
    
    1,751
    
    1,751Charlie
      Cornish
    
    
    
    
    Tom
      Drury*
    3,772
    
    
    
    Gordon
      Waters
    3,030
    
    2,648
    
    2,648 Notes:
    Non-executive
      directors do not participate in the companys share option plans.
    Tom
      Drury was appointed as a director on 9 May 2005.
    John
      Roberts retired as the chief executive officer and as a director on 31 March
      2006.
    Philip
      Green was appointed as a director on 20 February 2005 and as the chief executive
      officer on 31 March 2006. Purchase
  of own sharesAt
  the annual general meeting held on 29 July 2005, the company was authorised
  by the shareholders to purchase, in the market, up to 87,128,296 of its own
  ordinary shares of £1 each. No shares were purchased pursuant to this
  authority during the year. This authority is normally renewable annually and
  approval will be sought from shareholders at the 2006 annual general meeting
  to renew the authority for one year. Fulfilling
  social and environmental responsibilitiesAs
  described in the corporate responsibility review on page 30, the group seeks
  to manage its total impact on society as a responsible corporate citizen. Full
  details are set out in the companys separate stakeholder report, which
  is an important part of the companys integrated approach to reporting
  on the groups overall performance, together with the annual report and
  the website. Political
  and charitable donationsCharitable
  donations by the group in the year amounted to £1,324,308 (2005: £1,312,774).
  The groups policy is not to make any donations for political purposes.
  However, the Political Parties, Elections and Referendums Act 2000 requires
  certain types of expenditure on political events to be pre-approved by shareholders.
  At the 2005 annual general meeting an authority was taken to cover such expenditure.
  Pursuant to that authority, in the year, the company incurred costs of £22,499
  (2005: £12,845) as part of the process of talking to government at all
  levels. Resolutions to renew this authority for the company and its principal
  subsidiaries will be put to the 2008 annual general meeting.


Approach
  to technology developmentThe
  group is committed to using innovative, cost-effective and practical solutions
  for providing high quality services. It also continues to make full use of the
  wide-ranging expertise, abilities and facilities within the group. It recognises
  the importance of ensuring that it properly focuses its investment in the development
  of technology, that it has the right skills to apply technology to achieve sustainable
  competitive advantage and that it continues to be alert to emerging technological
  opportunities. Substantial
  shareholders and related party transactionsThe
  company is not directly or indirectly owned or controlled by another corporation
  or by an individual or government and there are no arrangements the operation
  of which may, at a subsequent date, result in a change in control of the company.
  At 31 May 2006, the directors were aware of the following notifiable beneficial
  interests of greater than three per cent in the companys issued ordinary
  share capital: Table
  16: Company
    Date
      notified
    
    No.
      of shares
    
    %Legal
      and General Group plc
      08/07/2005
    
      29,538,448
    
    3.38Prudential
      plc
    06/03/2006
    
    26,707,289
    
    3.05Spucegrove
      InvestmentManagement
      Ltd
    13/07/2005
    
    30,877,098
    
    3.54 Holders
  of all ordinary shares, including those held through ADSs, have the same voting
  rights. As of
  12 May 2006, there were 72 registered holders of 39,423,997 United Utilities
  PLC ADSs (representing 78,847,994 ordinary shares) with an address in the US,
  constituting nine per cent of the ordinary shares in issue at that date. In
  addition, at 12 May 2006, there were 127 registered holders of 53,761 ordinary
  shares with addresses in the US, constituting less than one per cent of the
  ordinary shares in issue at that date. Other
  than with respect to employment agreements and compensation arrangements, there
  is no material indebtedness owed to, or by, and there have been no material
  transactions between, the company and management during the companys three
  most recent financial years, nor are there presently proposed to be any such
  indebtedness or any material transactions, or any transactions that are unusual
  in their nature or conditions to which the company or any of its subsidiaries
  was or is a party and in which any director or executive officer, or five per
  cent shareholder, or any relative or spouse thereof or any associate of the
  company or any enterprise that directly or indirectly controls, is controlled
  by or is under common control with the company, had or is to have a direct or
  indirect material interest. For details
  of related party transactions see note 28 to the consolidated financial statements
  on page 102.






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|Directors'
    report continued |  |  | Governance
|                                |  |  |           



Creditor payment policy and practiceThe group does not follow any specific external code or standard on payment practice. Its policy is normally to pay suppliers according to terms of business agreed with them on
entering into binding contracts and to keep to the payment terms providing the relevant goods or services have been supplied in accordance with the contracts. The group and the company had 45 days (2005: 54 days) and 37 days (2005: 34 days)
respectively of purchases outstanding at the end of the financial year. IndemnitiesThroughout the year and as at the date of this report, the articles of association contained provisions for the benefit of directors, officers and employees of the group and its
subsidiary and associated companies indemnifying them out of the assets of the company to the full extent allowed by law against liabilities incurred by them in the course of carrying out their duties. Directors and officers insuranceThe
company maintains
an appropriate level of directors and officers insurance whereby
directors are indemnified against liabilities to third parties to the extent
permitted by the Companies Act. Financial instrumentsThe risk management objectives and policies of the company can be found in note 18 to the financial statements on page 90. Information given to auditorsEach of the persons who is a director at the date of approval of this report confirms that: (1)
   so
       far as the director is aware, there is no relevant audit information of
      which the companys auditors are unaware; and(2)
   the
       director has taken all the steps that he/she ought to have taken as a
       director in order to make himself/herself aware of any relevant audit
       information and
to establish that the companys auditors are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of s234ZA of the Companies Act 1985. Independent auditorsThe
board is proposing
to reappoint Deloitte & Touche LLP as auditors at the forthcoming annual
general meeting. Approved by the board on 31 May 2006 and signed on its behalf by Tim RaynerSecretary






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|Directors'
        remuneration report |  |  | Governance
|                                       |  |  |           



Approach to rewardThe group must ensure that its remuneration arrangements attract and keep people of the right calibre in order to ensure corporate success and to enhance shareholder value. Its
overall approach is to attract, develop, motivate and keep talented people at all levels, pay competitive salaries and benefits to its staff and encourage its staff to hold shares in the company. When pay levels are set, account is taken of the work
that an employee does and what is paid in other companies for that work. The company seeks to reward its people fairly and give them the opportunity to increase earnings by linking pay to achieving business and individual performance targets. 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 Inland Revenue approved share incentive plan, ShareBuy. This is a flexible way for employees to acquire shares in the company by
buying partnership shares up to the lower of £1,500 or ten 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 reinvest the dividends on partnership shares to buy more shares under the plan. In 2004, the company introduced matching shares.
It gives one free share for every five partnership shares bought. The shares
need to be held in trust for a five-year term in order to retain the maximum
tax advantages. Grants have also
been made to employees through the SAYE share option savings scheme, ShareSave, whereby an employee is granted an option to buy shares at the end of a
three or five-year term during which they can save up to £250 each month
from their net pay. The option price is fixed at a price not lower than 20 per
cent below the market price at the date of grant. The number of shares that can
be bought
is determined by the amount saved by the employee over the term. Senior executives
also have the opportunity to acquire shares by participating in the groups performance share plan. This plan has replaced the grant of executive share
options. Further information on the operation of the groups share schemes
can be found in note 27 to the accounts.


Aggregate remunerationDuring
the year, the aggregate amounts of remuneration paid to all directors and members
of the executive leadership team was £10,105,868 (2005: £8,181,178). This
includes executives salaries, annual bonuses earned and accrued in the
year to 31 March 2006 but paid after the year end, the value of long-term incentives
earned for the period ended 31 March 2005 and paid during the year and benefits
in kind. To fully comply with the 20-F reporting requirements, the 2006 figure
includes the total amounts set aside or accrued by the company or its subsidiaries
in 2005/06, including the value of contributions to pension schemes, to provide
pension,
retirement or similar benefits. To ensure an appropriate comparison, the figure
for 2005 has also been adjusted to take account of pensions benefits. NON-EXECUTIVE
      DIRECTORS (INCLUDING THE CHAIRMAN) A
      committee of the board decides the remuneration of the non-executive directors
      (other than
the chairman). Its members are the chairman (Sir Richard Evans) and the executive
directors, John Roberts (to 31 March 2006), Philip Green (from 20 February 2006),
Simon Batey, Charlie Cornish, Tom Drury (from 9 May 2005) and Gordon Waters.
The committee may take independent advice. It is also advised by the groups
human resources director (Linda Booth). The committee met once during the year
to review the fees paid to non-executive directors. The remuneration committee
decides the remuneration of the chairman. Terms of appointmentNon-executive
directors appointments are for an initial period of three years. They are subject to reappointment at the first annual general meeting after their initial
appointment and at an annual general meeting at least every three years thereafter if they are to be renewed. After nine years in office a non-executive director is required to seek reappointment each year at the annual general meeting. They do not
have contracts of service. In the event of early termination, for whatever reason, they are not entitled to compensation. Their letters of appointment can be inspected at the companys registered office and on the companys
website at www.unitedutilities.com. They set out the expected time commitment
and non-executives agree to devote sufficient time to meet what is expected of
them.


Table
17: Non-executive directors terms of appointment

|                    | Date first |  | Date of last |  | Reappoint no |  |               |  | Compensation
|------------------- | ---------- |  | ------------ |  | ------------ |  | ------------- |  | ------------
|                    | appointed  |  | appointment  |  | later than   |  |               |  | upon early  
|                    | to board   |  | AGM in       |  | AGM in       |  | Notice period |  | termination 
|                    |            |  |              |  |              |  |               |  |             
|Sir Richard Evans   | 01.09.1997 |  | 2004         |  | 2007         |  | none          |  | none        
|Sir Peter Middleton | 01.01.1994 |  | 2005         |  | 2006         |  | none          |  | none        
|Norman Broadhurst   | 01.04.1999 |  | 2005         |  | 2008         |  | none          |  | none        
|Paul Heiden         | 05.10.2005 |  | n/a          |  | 2006         |  | none          |  | none        
|David Jones         | 03.01.2005 |  | 2005         |  | 2008         |  | none          |  | none        
|Jane Newell         | 01.09.1996 |  | 2003         |  | 2006         |  | none          |  | none        
|Andrew Pinder       | 01.09.2001 |  | 2005         |  | 2008         |  | none          |  | none        
|Nick Salmon         | 04.04.2005 |  | 2005         |  | 2008         |  | none          |  | none        
|John Seed           | 01.03.1996 |  | 2002         |  | n/a          |  | none          |  | none        
|                    |            |  |              |  |              |  |               |  |             

|Note:
|-----
|    



|United
          Utilities Annual Report & Accounts 2006 | 41
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|                                                 |  |  |           
|------------------------------------------------ |  |  | ----------
|Directors'
        remuneration report continued |  |  | Governance
|                                                 |  |  |           



Policy
statement on non-executive directors remunerationThe
company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, deputy chairman and the other non-executive directors. Additional fees are paid to the chairmen of the audit committee (Norman
Broadhurst) and remuneration committee (John Seed to 29 July 2005 and David Jones from 29 July 2005). Non-executive directors do not participate in any annual bonus or incentive plan, the pension scheme, healthcare arrangements, the companys
long-term incentive plans or employee share schemes. The company repays the reasonable
expenses they incur in carrying out their duties as directors. Non-executive
directors remunerationNon-executive
directors fees were increased on 1 September 2005. The base fee is £47,250 a year. The annual fee paid to Sir Peter Middleton, deputy chairman, is
£84,000. The additional fees paid to the chairmen of the audit and remuneration committees are £10,000 and £7,500 a year respectively. The chairmans fee increased to £210,000 a year. The next review of non-executive
directors fees will be in September 2006. Non-executive directors remuneration
for the year to 31 March 2006 is set out in table 18. Table
18: Non-executive directors fees (audited information) Total fees2006
   
   2005£000
   
   £000Sir Richard Evans
   205.0
   
   193.5Norman Broadhurst
   56.3
   
   53.8Paul Heiden
   23.1
   
   David Jones
   51.4
   
   11.0Sir Peter Middleton
   82.3
   
   78.3Jane Newell
   46.3
   
   73.3Andrew Pinder
   93.8
   
   89.2Nick Salmon
   45.9
   
   John Seed
   17.2
   
   51.5Total
   621.3
   
   550.6 Notes:
   David Jones was appointed to the board on 3 January 2005.
   Nick Salmon was appointed to the board on 4 April 2005. His yearly fee is £47,250.
   Paul Heiden was appointed to the board on 5 October 2005. His yearly fee is £47,250.
   John Seed resigned from the board on 29 July 2005.
   Between August 2004 and March 2006, Andrew Pinder received additional fees in his capacity as a non-executive director of Vertex Data Science Limited. During
the year, fees of £47,500 became due (2005: £45,000). These are included in the figures above. He resigned as a director of Vertex Data Science Limited on 31 March 2006.
   Jane Newells fee for 2005 includes an additional amount of £30,000 paid to her in her capacity as chairman of the companys pension
schemes trustee until 31 March 2005.


EXECUTIVE DIRECTORS The remuneration committeeThe
remuneration committee makes recommendations to the board on the groups framework of executive remuneration and its cost. It approves, on the boards behalf, the
general recruitment terms, remuneration benefits, employment conditions and severance terms for executive management. It decides the specific recruitment terms, remuneration benefits, employment conditions, pension rights, compensation payments and
severance terms for the executive directors and managing directors of subsidiary businesses and functional directors at the groups
corporate centre who form the executive leadership team. The committees members are David Jones (Chairman from 29 July 2005), Norman Broadhurst, Paul Heiden (from 5 October 2005), Sir Peter Middleton, Jane Newell, Andrew Pinder and
Nick Salmon (from 4 April 2005). All are non-executive directors determined by the board to be independent in accordance with the Combined Code. 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. They have no conflicts of interest arising from cross-directorships and are not involved in the day-to-day running of the groups businesses. John Seed was a member and chairman
of the committee until 29 July 2005. The committees terms of reference are available to shareholders on request and are on the companys
website at www.unitedutilities.com. The committee has
retained New Bridge Street Consultants LLP to advise it on executive remuneration.
They also advise the company on the remuneration of a limited number of senior
executive managers whose specific terms 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 advise the committee on pensions matters. They are also the actuaries to one of the companys pension schemes (United Utilities Pension Scheme) and advise the company on matters
relating to its operation. Eversheds LLP provide legal advice on the operation of the groups
share incentive and share option plans, including drafting the rules and advising
on their interpretation and may advise on individual termination arrangements.
They also provide general legal advice to the group. The committee is
assisted by the chief executive officer, who is consulted on proposals relating
to the remuneration of the other executive directors and senior executives and
by
the groups human resources director. They and the company secretary, attend
meetings except when the committee discusses matters relating to their own remuneration.
The committee can and does also seek advice directly from other specialist staff
within the group. The committee considers fully the principles of good governance and the code of best practice. It met six times in the year to 31 March 2006. Individual attendance at the meetings
is stated in the corporate governance report on page 57. During the year, matters considered by the committee included: 
   the 2005 salary review for executive directors and other senior executives;




|42 | United
        Utilities Annual Report & Accounts 2006
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
   awards payable under the 2004/05 annual bonus plan and the measures and targets for the 2005/06 plan;
   the
       size of and performance conditions to apply to the 2005/06 grant of awards
       under the performance share plan and international plan, adjustments to
       awards granted under the 2003/04 and 2004/05 plans consequent upon the
       second stage of the groups rights issue, monitoring ongoing performance
       against the conditions applying to previous grants, eligibility for future
       awards and the vesting of the
2002/03 awards;
   the implications of tax simplification legislation on pension policy and provision for executives;
   monitoring of executive shareholdings against target;
   the terms of appointment for the new chief executive officer and the new chief financial officer; and
   the form and content of the remuneration report in light of developments in stakeholder views and evolving best practice on disclosure. The committee also reviewed the incentive arrangements for executive directors
and members of the executive leadership team. Details of revised annual bonus
arrangements and proposed changes to the long-term incentive plans (the performance
share plan and its equivalent for overseas based executives, the international
plan) are given later in this report. The changes to these plans are subject
to shareholder approval at the annual general meeting on 28 July 2006. It is
also proposed to introduce a matching share plan for executive directors and
members of the executive leadership team in 2007. During 2006/07, the committee
will consult institutional investors regarding the plan, including the performance
conditions. It is proposed that the rules of the proposed matching share plan
will be submitted for shareholder approval at the annual general meeting in 2007. The board accepted
the committees recommendations without amendment. The chairman of the board
ensures the company talks to its major shareholders, when appropriate, about
matters relating to remuneration. Policy
statement on executive directors remunerationThe
boards policy for executive directors and senior executives remuneration
is to: 
   pay a basic salary which compares with other companies of about the same size and complexity;
   use short and long-term incentives to encourage executives to out-perform key targets, thereby linking their rewards to the interests of shareholders and other
stakeholders and giving them the opportunity to increase their earnings;
   encourage executives to hold shares in the company; and
   overall,
       reward executives fairly and responsibly for their contribution to the
       groups short and long-term performance and avoid paying more than
       is
necessary for achieving this objective. In deciding the
executive directors total remuneration package and individual elements
of it, the remuneration committee assesses where the company should be positioned
relative to other companies. It makes appropriate comparisons but treats them
with caution. The company aims to pay about the market median but may pay more
for an outstanding performer or to


attract executives of the right calibre. Earnings may be increased through the
operation of annual and long-term incentive plans. 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 and a long-term incentive (the
performance share plan). The plans are designed to establish a clear link between
pay and performance by encouraging and rewarding out-performance in both the
short and long term. They are based on 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 group should be run.The board continually reviews its
policy in the
light of emerging best practice. During 2005/06,
the committee reviewed the operation of the groups incentive arrangements
in the light of evolving market practice and to ensure that rewards remained
competitive and aligned to shareholder interests. It considered that changes
were needed to annual and long-term incentives to make a greater proportion of
the reward package performance-related bringing it more in line with market practice
to facilitate the recruitment and retention of key executives. With effect from
2006/07 the annual bonus maximum for executive directors will be 75 per cent
of salary (increased from 60 per cent). Changes are proposed to the operation of the performance share plan and the international
plan. The main changes relate to a proposed reduction in the percentage of the
maximum award vesting at median performance from 33 per cent to 25 per cent and
the introduction of notional dividend reinvestment on the number of shares comprising
awards. The opportunity has also been taken to make minor changes in the rules
to aid
administration of the plans. It is the boards policy that shareholders will be invited specifically
to approve all new long-term incentive schemes (as defined in the Listing Rules)
and significant changes to existing schemes, save in the circumstances permitted
by the Listing Rules. Information on and a resolution seeking shareholder approval
to revisions to the rules of the plans are included in the shareholders circular
and notice for
this years annual general meeting. The plans rules will be available
for inspection by shareholders. The group operates a defined contribution pension scheme which newly appointed
directors (and senior executives) can join. A number of directors and executives
are members of the defined benefit section of the pension scheme which is now
closed to new entrants. Amendments have been made to pension policy and the operation
of existing arrangements resulting from consideration of tax simplification legislation.
These are
detailed later in the report.




|United
          Utilities Annual Report & Accounts 2006 | 43
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|                                         |  |  |           
|---------------------------------------- |  |  | ----------
|Directors remuneration report continued |  |  | Governance
|                                         |  |  |           



Chart
    1 sets out the forward policy for an executive directors annual total reward. It shows both the current and revised/ proposed arrangements, effective from 2006/07,
assuming shareholder approval is obtained where necessary. It is expressed in terms of the maximum reward opportunity. The impact of the changes from 2006/07 will increase the proportion of the maximum reward opportunity that is at risk from
about 50 per cent to 56 per cent. Chart 1: Executive directors annual total reward  Notes:
      The
        figures represent the value of each element of the reward package relative
        to base pay.
      Pension
        refers to the defined contribution scheme with a company contribution
        of 25 per cent of basic pay.
      The
        maximum values apply only where maximum annual bonus is achieved and the
        performance share plan has paid out fully.
      The
        revised value for the performance share plan assumes a dividend reinvestment
        value of seven per cent a year for each of the three years of the performance
        period. The company expects executive directors and other senior executives to acquire
and hold shares at least to the value of their basic salary within five years
of appointment. To assist them in satisfying this minimum share ownership target,
it may pay incentive awards partly or wholly in shares. Detailed policy
in relation to executive directors remuneration is set out below.


Executive
directors remuneration 2005/06Executive
directors emoluments and the value of the long-term incentive vesting during
2005/06 are set out in
table 19. A  SalaryThe
remuneration committee reviews salaries each year taking account of group and
personal performance. It commissions independent assessments of market rates
based on the practice of other utility companies and companies of a similar size
and complexity and takes account of the levels of pay awards elsewhere in the
group. In this way it aims to establish whether and what level of increase should
apply and whether there should be any departures from this, for example, to ensure
that salaries are competitive but consistent with the application of board policy
on executive remuneration. The following changes were made to the annual salaries of executive directors
during the year: Table
20: Executive directors salaries 31
        March
      
      31
        March2006
      
      2005
      
      Date
        of£000
      
      £000
      
      changeJohn
        Roberts
      540.0
      
      504.0
      
      1
        Sept 05Philip
        Green
      675.0
      
      
      
      13
        Feb 06Simon
        Batey
      371.0
      
      346.5
      
      1
        Sept 05Charlie
        Cornish
      290.0
      
      250.0
      
      1
        Sept 05Tom
        Drury
      310.0
      
      285.0
      
      9
        May 05Gordon
        Waters
      315.0
      
      294.0
      
      1
        Sept 05 Notes:
      Philip
        Green was appointed to the board on 20 February 2006.
      Tom
        Drury was appointed to the board on 9 May 2005.




Table
19: Executive directors emoluments and long-term incentive payments (audited
information)

|                |                  |  |                  |  |                    |  |                      |  |                         |  |       |  |         |  |         |  | Long-term
    incentive | 
|--------------- | ---------------- |  | ---------------- |  | ------------------ |  | -------------------- |  | ----------------------- |  | ----- |  | ------- |  | ------- |  | ----------------------- | 
|                |                  |  |                  |  |                    |  |                      |  |                         |  |       |  |         |  |         |  | vesting
    during the  | 
|                | Gross
    salary |  | Annual
    bonus |  | Other
    benefits |  | Total
    emoluments |  | year
    ended 31 March | 
|                |                  |  |                  |  |                    |  |                      |  |                         |  |       |  |         | 
|                | 2006             |  | 2005             |  | 2006               |  | 2005                 |  | 2006                    |  | 2005  |  | 2006    |  | 2005    |  | 2006                    | 
|                | £000            |  | £000            |  | £000              |  | £000                |  | £000                   |  | £000 |  | £000   |  | £000   |  | £000                   | 
|                |                  |  |                  |  |                    |  |                      |  |                         |  |       |  |         |  |         |  |                         | 
|John Roberts    | 525.0            |  | 494.0            |  | 229.7              |  | 281.6                |  | 36.8                    |  | 38.4  |  | 791.5   |  | 814.0   |  | 465.1                   | 
|Philip Green    | 74.3             |  |                 |  |                   |  |                     |  | 2.4                     |  |      |  | 76.7    |  |        |  |                        | 
|Simon Batey     | 360.8            |  | 339.6            |  | 179.5              |  | 193.6                |  | 18.4                    |  | 18.6  |  | 558.7   |  | 551.8   |  | 310.1                   | 
|Charlie Cornish | 273.3            |  | 243.7            |  | 142.0              |  | 138.9                |  | 25.4                    |  | 107.7 |  | 440.7   |  | 490.3   |  |                        | 
|Tom Drury       | 277.5            |  |                 |  | 103.9              |  |                     |  | 14.5                    |  |      |  | 395.9   |  |        |  |                        | 
|Gordon Waters   | 306.3            |  | 288.2            |  | 143.5              |  | 164.3                |  | 28.8                    |  | 28.5  |  | 478.6   |  | 481.0   |  | 237.7                   | 
|                |                  |  |                  |  |                    |  |                      |  |                         |  |       |  |         |  |         |  |                         | 
|Total           | 1,817.2          |  | 1,365.5          |  | 798.6              |  | 778.4                |  | 126.3                   |  | 193.2 |  | 2,742.1 |  | 2,337.1 |  | 1,012.9                 | 
|                |                  |  |                  |  |                    |  |                      |  |                         |  |       |  |         |  |         |  |                         | 
|                |                  |  |                  |  |                    |  |                      |  |                         |  |       |  |         |  |         |  |                         | 

|Notes:
|------
|      
|     
|      
|     
|      
|     
|      
|     
|      
|     
|      
|     
|      
|     



|44 | United
        Utilities Annual Report & Accounts 2006
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B  Annual
  bonusThe
  annual bonus is designed to motivate executive directors and other senior executives
  to achieve the groups key operational and strategic objectives. Directors
  are rewarded according to the companys financial and non-financial performance
  for the year and the achievement of individual targets. Targets are set each
  year. The non-financial and individual targets may include personal objectives
  and performance against other key stakeholder measures. Annual bonus awards
  are normally paid in cash. However, the committee may pay them partly or wholly
  in shares. (a) 2006/07The
remuneration committee has decided that, for the 2006/07 annual bonus plan, the
maximum bonus will be 75 per cent of salary for executive directors and 60 per
cent for other members of the executive leadership team. For executive directors,
financial measures will account for bonus payments worth up to 50 per cent of
salary. The financial measures will be group profit before exceptional items,
interest and tax (PBEIT) and profit before exceptional items and tax (PBET) (weighted
equally) and the
major businesses PBEIT and PBET (weighted equally). The allocation of bonus
to these measures varies by director and is indicated in table 21. For the financial measures, one quarter of the maximum award becomes payable
when the threshold target is met. Awards increase in value on a straight-line
basis until half of the maximum award is payable for achieving an intermediate
target midway between the threshold and stretch targets. Awards continue to increase
in value on a straight-line basis between the intermediate and stretch targets,
at which point the maximum
award is


payable.
    The stretch targets are demanding and achievement represents results which
  exceed expectations. One
    third of the executive directors annual bonus, accounting for 25 per
    cent of salary, will depend on performance in other areas of the groups
    activities and the achievement of individual objectives. Individual objectives
    account for 15 per cent bonus. 5 per cent bonus will be payable for achieving
    customer service targets. Performance in the Business in the Communitys
    (BitC) Corporate Responsibility Index (CRI), an authoritative and broad external
    benchmark of responsible business practice in relation to the environment
    and society, will account for 2.5 per cent for achieving a target of 96 per
    cent for the groups score. A further 2.5 per cent per cent is allocated
    for achieving improvements in employee satisfaction measured by responses
    to questions in an externally conducted and verified employee opinion survey. The
    executive directors annual bonus plan for 2006/07 is summarised in
    table 21. (b)
      2005/06The
  financial measures to determine annual bonuses for 2005/06 were group PBEIT
  and PBET. The maximum bonus opportunity allocated to each of these targets
  was 24 per cent for the chief executive and finance director and 18 per cent
  for business managing directors who also had financial targets based on their
  own business PBEIT and PBET performance, each accounting for 6 per cent
  bonus. Non-financial targets accounted for up to 12 per cent of salary of which
  three per cent was based on the group score in the BitC CRI, three per cent
  on scores in the 2005/06 employee opinion survey and six per cent on the achievement
  of individual objectives.




Table
      21: Executive directors annual bonus plan measures 2006/07

|                             |            |  |            |  |            |  | Financial
      maximum award |  |          |  |                |  | Non-financial
      maximum award | 
|---------------------------- | ---------- |  | ---------- |  | ---------- |  | ----------------------------- |  | -------- |  | -------------- |  | --------------------------------- | 
|                             |            |  |            |  |            |  |                               |  |          |  |                |  |                                   | 
|                             | Group      |  | UUNW       |  | UUCS       |  | Vertex                        |  | Customer |  | Corporate      |  | Employee                          | 
|                             | financials |  | financials |  | financials |  | financials                    |  | service  |  | responsibility |  | satisfaction                      | 
|                             | %          |  | %          |  | %          |  | %                             |  | %        |  | %              |  | %                                 | 
|                             |            |  |            |  |            |  |                               |  |          |  |                |  |                                   | 
|Philip
      Green           | 35         |  |           |  | 7.5        |  | 7.5                           |  | 5        |  | 2.5            |  | 2.5                               | 
|Simon
      Batey/Tim Weller | 35         |  |           |  | 7.5        |  | 7.5                           |  | 5        |  | 2.5            |  | 2.5                               | 
|Charlie
      Cornish        | 10         |  | 25         |  | 7.5        |  | 7.5                           |  | 5        |  | 2.5            |  | 2.5                               | 
|Tom
      Drury              | 10         |  | 7.5        |  | 7.5        |  | 25                            |  | 5        |  | 2.5            |  | 2.5                               | 
|Gordon
      Waters          | 10         |  | 7.5        |  | 25         |  | 7.5                           |  | 5        |  | 2.5            |  | 2.5                               | 
|                             |            |  |            |  |            |  |                               |  |          |  |                |  |                                   | 
|

|      
|------
|Notes:
|      
|     
|      
|     
|      
|     
|      
|     

Table
22: Executive directors annual bonus plan outcome 2005/06

|                      |                        |  |                           |  |             |  |                             |  | Financial
      award          |  |        |  |       |  |        |  |      |  | Non-financial
      award | 
|--------------------- | ---------------------- |  | ------------------------- |  | ----------- |  | --------------------------- |  | ------------------------------ |  | ------ |  | ----- |  | ------ |  | ---- |  | ------------------------- | 
|                      |                        |  |                           |  |             |  |                             |  |                                |  |        |  |       |  |        |  |      |  |                           | 
|                      |                        |  |                           |  |             |  |                             |  | Corporate
      responsibility |  |        |  |       |  |        |  |      |  |                           | 
|                      | Group
      financials |  | Business
      financials |  | performance |  | Employee
      satisfaction |  | Personal
      objectives      |  |        |  | Total | 
|                      |                        |  |                           |  |             |  |                             |  |                                |  |        |  |       | 
|                      | Max.                   |  | Actual                    |  | Max.        |  | Actual                      |  | Max.                           |  | Actual |  | Max.  |  | Actual |  | Max. |  | Actual                    | 
|                      |                        |  |                           |  |             |  |                             |  |                                |  |        |  |       |  |        |  |      |  |                           | 
|John
      Roberts    | 48                     |  | 39.25                     |  |            |  |                            |  | 3                              |  | 3      |  | 3     |  | 1.5    |  | 6    |  | 0                         | 
|Simon
      Batey     | 48                     |  | 39.25                     |  |            |  |                            |  | 3                              |  | 3      |  | 3     |  | 1.5    |  | 6    |  | 6                         | 
|Charlie
      Cornish | 36                     |  | 29.44                     |  | 12          |  | 12                          |  | 3                              |  | 3      |  | 3     |  | 1.5    |  | 6    |  | 6                         | 
|Tom
      Drury       | 36                     |  | 29.44                     |  | 12          |  | 0                           |  | 3                              |  | 3      |  | 3     |  | 1.5    |  | 6    |  | 3.5                       | 
|Gordon
      Waters   | 36                     |  | 29.44                     |  | 12          |  | 9.93                        |  | 3                              |  | 3      |  | 3     |  | 1.5    |  | 6    |  | 3                         | 
|                      |                        |  |                           |  |             |  |                             |  |                                |  |        |  |       |  |        |  |      |  |                           | 

|      |                                      
|----- | -------------------------------------
|Note:
|      |                                      
|     | Figures
    are percentage of salary.



|United
          Utilities Annual Report & Accounts 2006 | 45
|-------------------------------------------------------- | --

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Back to Contents

|                                         |  |  |           
|---------------------------------------- |  |  | ----------
|Directors remuneration
report continued |  |  | Governance
|                                         |  |  |           



The outcome of the 2005/06 annual bonus plan for executive directors is shown
in table 22. The group PBET stretch target was achieved. The PBEIT stretch target
was not achieved. This resulted in 81.77 per cent of the bonus relating to group
financial performance being payable. The corporate responsibility target of 94
per cent was achieved (performance = 95.5 per cent). One of the employee-related
targets (based on the results of the employee opinion survey) was achieved resulting
in 1.5 per cent bonus being payable. The extent to which each director achieved
their individual personal objectives is shown in table 22. C  Other
benefitsDirectors
are paid
a car allowance of £14,000 a year or have the use of a company car of broadly
equivalent cost, are reimbursed the cost of fuel for business and private use,
and are provided with medical and life insurance and, if not a member of the
defined benefit pension scheme, permanent health insurance. D  Long-term
incentivesExecutive
directors and other senior executives participate in the performance share plan.
Awards
are granted at the discretion of the plans trustee (United Utilities Employee
Share Trust Limited) on the recommendation of the remuneration committee. Each
year, participants may be awarded a right to acquire a maximum number of shares
(or, at the discretion of the trustee, the cash equivalent) 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 on the market price of a share at that time. The plans
rules provide for a maximum award of 100 per cent of annual salary. However,
annual awards made to date to directors have been limited to 80 per cent of salary.
Awards to other executives range between 10 per cent and 60 per cent of salary.
Grants are normally made within 42 days of the publication of results. The main
grant occurs after the publication of the preliminary results. A subsequent grant
may be made after the publication of the interim results for executives who have
become eligible after the main grant has been made. The proportion
of the award that will vest depends on the group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 if the performance criteria are not met. To date, the performance
criteria have been: the companys total shareholder return (TSR) performance
when compared with the TSR performance of a group of other companies; and underlying
business performance. TSR is widely accepted as an easily understood and externally verifiable measure
of a shareholders return. Relating awards to the companys relative
TSR performance
supports the policy objectives of linking executives rewards directly to
the groups performance and shareholders interests and gives executives
the opportunity to increase their earnings by meeting and out-performing key
long-term
measures. The inclusion of appropriate companies in the comparator group is critical for
relative performance to be meaningful. However, it is also important that the
group should be of a reasonable size to avoid the performance of a few companies
having a disproportionate impact on the outcome of the plan, to be able to accommodate
changes in the comparator group and to avoid too high a leverage between the
companys relative position and the proportion of the award that vests.
The remuneration committee reviews and determines the composition of the comparator
group when awards are
granted


each
    year. It has the discretion to make subsequent adjustments to the group or
    the period over which relative TSR is measured during the performance period
    to maintain the integrity of the plan, for example, following a takeover
    bid or activity or merger/ demerger announcement. During the year, the remuneration
    committee considered the treatment of changes affecting companies in the
    comparator groups for awards made
in 2003/04 and 2004/05. No award will vest
if the companys TSR performance is below the median for the comparator
group. If performance is between median and upper quartile, the proportion of
the maximum number of shares in the award which will vest will be calculated
on a straight-line basis between 33 per cent and 100 per cent. (It is proposed
that with effect from the 2006/07 awards, the proportion vesting at median will
be reduced to 25 per cent) External advisers regularly assess and report to the
committee on the companys TSR performance and ranking in the comparator
group. Their report at the end of the performance period enables the committee
to determine the extent to which
this performance condition has been met. The vesting of awards is also subject to the remuneration committee being satisfied
that the
companys recorded TSR performance is consistent with underlying business
performance. It may, therefore, materially change the level of award vesting.
The committee tests whether this condition has been satisfied after the end of
each performance period in accordance with the terms of each award. Reference
may be made to actual against planned performance in key corporate financial
measures. The committee takes account of the impact of the transition to International
Financial Reporting Standards when assessing underlying business performance
against the performance
measures. 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. Participants normally have three months from the date the award vests in which
to exercise their right to acquire the number of shares that have vested. Awards
are normally satisfied by the transfer of shares from the trustee to participants.
The trustee may periodically buy shares in the market to ensure that it can satisfy
its liabilities when an award vests. These purchases are normally financed by
the company making a loan to the trustee. The company takes account of the vesting
timetable and likely scale of vesting in determining the financial assistance
it provides for the trustee. The company reviews this arrangement from time to
time to ensure its cost-effectiveness. Awards may also be satisfied by allotting
shares. Details of the number of shares held by the trust at 31 May 2006 are
given in the notes to table 14 on page 38.




|46 | United
        Utilities Annual Report & Accounts 2006
|-- | ------------------------------------------------------

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(a) 2006/07
grantThe
proposed 2006/07 awards to each director will be an option to acquire shares
worth up
  to a potential value of 80 per cent of their annual salary at grant. It is
  expected the TSR comparator group will comprise the following 16 companies
  in addition to United Utilities: AMEC, AWG, Balfour Beatty, BG Group, British
  Energy, BT Group, Centrica, International Power, Kelda Group, National Grid,
  Northumbrian Water, Pennon
  Group, Scottish & Southern Energy, Scottish Power, Severn Trent and Viridian. The performance period will be 1 April 2006 to 31 March 2009. Awards will vest after the end of the performance period provided that the remuneration committee is
  satisfied that the companys recorded TSR performance is consistent with the companys
  underlying business performance. The proposed scale of vesting, based on 25
  per cent of the award vesting at median and 100 per cent for upper quartile
  performance, is set out in table 23. Table 23: 2006/07 grant proposed vesting scale 2006/07
      planComparator group size (No. of companies)
   
   
   
   17%
      of max
  
  %
      ofRanking
   
   award
       vesting
   
   salary1 to 4
   
   100
   
   805
   
   92
   
   73.66
   
   75
   
   607
   
   58
   
   46.48
   
   42
   
   33.69
   
   25
   
   2010 or below
   
   0
   
   0 Note:
      Subject
        to shareholder approval at the annual general meeting, it is proposed
        that the maximum number of shares in awards will be enhanced by the notional
        reinvestment of dividends. (b)
    2005/06 grantDuring
    the year, option awards to a maximum value of 80 per cent of annual salary
    were made to directors in respect of the 2005/06 performance share plan The
    extent to which awards vest will be based on the companys TSR performance
    relative to the comparator group of companies over the period 1 April 2005
    to 31 March 2008. The TSR comparator group comprises the following 16 companies
    in addition to United Utilities: AMEC, AWG, BAA, Balfour Beatty, BG Group,
    BT Group, Centrica, International Power, Kelda Group, National Grid, Northumbrian
    Water, Pennon Group, Scottish & Southern Energy, Scottish Power, Severn
    Trent and Viridian. Awards will vest after the end of the performance period
    provided that the remuneration committee is satisfied that the companys
    recorded TSR performance is consistent with the companys underlying
    business
performance. (c)
    2004/05 grantAwards
    to a maximum value of 80 per cent of annual salary were made to directors
    in respect of the 2004/05 performance share plan. The extent to which awards
    vest will be based on the companys TSR performance relative to the
    comparator group of companies over the period 1 April 2004 to 31 March 2007.
    The comparator group comprises the following 16 companies in addition to
    United Utilities: AMEC, AWG, BAA, Balfour Beatty, BG Group, BT Group, Centrica,
    International Power, Kelda Group, National Grid Transco, Northumbrian Water,
    Pennon Group, Scottish & Southern Energy, Scottish Power, Severn Trent
    and Viridian. In addition, three smaller companies, Bristol Water, East Surrey
    Holdings and International Energy Group, were included as a notional combined
    17th
company


made up in proportion to their market capitalisations at the start of the performance
period. During the year, as a result of takeover bids for East Surrey Holdings
and International Energy Group, it was decided to retain the notional 17th company
in the comparator
group and United Utilities TSR performance relative to it compared from
the beginning of the performance period until the day before the first takeover
bid was announced. Awards will vest after 31 March 2007 provided that the remuneration
committee is satisfied that the companys recorded TSR performance is consistent
with the companys
underlying business performance. (d) 2003/04 grantThe
extent to which
awards vest is based in part on the companys TSR performance relative to
the comparator group of companies over the period 1 April 2003 to 31 March 2006.
The comparator group comprises 15 companies in addition to United Utilities.
British Energy delisted during 2004/05. It has been retained in the comparator
group and United Utilities TSR Performance relative to it compared from
the beginning of the performance period until the delisting. The test against
measures of underlying business performance will take account of performance
against the earnings per share, dividend cover and interest cover targets for
2005/06 set out in the
groups five-year business plan to 2007/08.




|United
          Utilities Annual Report & Accounts 2006 | 47
|-------------------------------------------------------- | --

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|                                                 |  |  |           
|------------------------------------------------ |  |  | ----------
|Directors remuneration
        report continued |  |  | Governance
|                                                 |  |  |           



The vesting scales for the three plans in operation at 31 March 2006 are set
out in table 24.

Table 24: Performance share plan vesting scales

|                                               |  | 2003/04
      plan |  | 2004/05
      plan |  | 2005/06
      plan | 
|---------------------------------------------- |  | ------------------ |  | ------------------ |  | ------------------ | 
|                                               |  |                    |  |                    |  |                    | 
|Comparator
      group size (No. of companies) |  | 16                 |  | 18                 |  | 17                 | 
|                                               |  |                    |  |                    |  |                    | 
|                                               |  |                    |  |                    |  |                    | 
|                                               |  | %
      of max     |  |                    |  | %
      of max     | 
|Ranking
      in comparator group              |  | award vesting      |  | %
      of salary  |  | award vesting      | 
|                                               |  |                    |  |                    |  |                    | 
|1
      to 4                                   |  | 100                |  | 80                 |  | 100                | 
|5                                              |  | 88                 |  | 70.4               |  | 97                 | 
|6                                              |  | 72                 |  | 57.6               |  | 82                 | 
|7                                              |  | 57                 |  | 45.6               |  | 68                 | 
|8                                              |  | 41                 |  | 32.8               |  | 54                 | 
|9                                              |  | 0                  |  | 0                  |  | 40                 | 
|10
      or below                              |  | 0                  |  | 0                  |  | 0                  | 
|                                               |  |                    |  |                    |  |                    | 

The TSR performance at 31 March 2006 for each of the current plans is set out
in table 25. The performance period for the 2003/04 plan ended on 31 March 2006.
The percentage vesting shown in the table indicates the proportion of the maximum
award which will vest during 2006/07 if the TSR performance is considered to
be consistent with underlying financial performance. The performance periods
for the 2004/05 and 2005/06 plans do not end until 31 March 2007 and 31 March
2008 respectively. The percentage vesting for those plans shown in the table
are notional indications of the proportion of the maximum award which would vest
if the specified ranking was the
companys position at the end of the respective performance period and was
consistent with underlying business performance.

Table 25: Performance share plan TSR performance

|                            |  | 2003/04
      plan |  | 2004/05
      plan      |  | 2005/06
      plan | 
|--------------------------- |  | ------------------ |  | ----------------------- |  | ------------------ | 
|                            |  |                    |  |                         |  |                    | 
|Performance
      period    |  |                    |  | 1.4.03
      to 31.3.06 |  |                    | 
|                            |  |                    |  |                         |  |                    | 
|Comparator
      group size |  |                    |  |                         |  |                    | 
|(No.
      of companies)    |  |                    |  |                         |  | 16                 | 
|                            |  |                    |  |                         |  |                    | 
|                            |  |                    |  |                         |  |                    | 
|Date                        |  | Period TSR %       |  | Ranking                 |  | %
      vesting    | 
|                            |  |                    |  |                         |  |                    | 
|31.3.06                     |  | 66.5               |  | 8                       |  | 41                 | 
|                            |  |                    |  |                         |  |                    | 
|                            |  |                    |  |                         |  |                    | 

|Note:
|-----
|     
|    

Details
    of directors continuing scheme interests in the performance share plan,
    including those awarded during
the year, are set out in table 26.



|48 | United
        Utilities Annual Report & Accounts 2006
|-- | ------------------------------------------------------

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Back to Contents

Table 26: Executive directors continuing scheme interests in the performance share plan (audited information)

|                      |  | ****           | **** | ****    | **** | ****                    | ****                | ****       | ****               | ****             | **** | ****                | **** | ****               | **** | Contingent
      scheme | **** | Contingent
      scheme | **** | Contingent
      scheme |     
|--------------------- |  | -------------- | ---- | ------- | ---- | ----------------------- | ------------------- | ---------- | ------------------ | ---------------- | ---- | ------------------- | ---- | ------------------ | ---- | ----------------------- | ---- | ----------------------- | ---- | ----------------------- | ----
|                      |  | ****           | **** | ****    | **** | ****                    | ****                | ****       | ****               | ****             | **** | ****                | **** | ****               | **** | interest
      at       | **** | interest
      awarded  | **** | interest
      at       |     
|                      |  | ****           | **** | ****    | **** | ****                    | ****                | ****       | ****               | ****             | **** | Award
      details | **** | 1
      April 2005 | **** | during
      the year   | **** | 31
      March 2006     |     
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                        
|                      |  | ****           | **** | ****    | **** | ****                    | Maximum
      value | ****       | ****               | ****             | **** | ****                | **** | ****               | **** | ****                    | **** | ****                    | **** | ****                    | ****
|                      |  | ****           | **** | ****    | **** | ****                    | at
      award date | ****       | Market
      price | ****             | **** | ****                | **** | ****               | **** | ****                    | **** | ****                    | **** | ****                    | ****
|                      |  | ****           | **** | ****    | **** | ****                    | ****                |            | ****               | of
      a share | **** | ****                | **** | ****               | **** | ****                    | **** | ****                    | **** | ****                    | ****
|                      |  | ****           | **** | Award   |      | Performance             |                     | %
      of |                    |                  | **** | at
      award      | **** | Max.
      no.     |      | Max.
      no.          |      | Value                   |      | Max.
      no.          |     
|                      |  | ****           | **** | date    |      | period                  |                     | salary     |                    | £000            | **** | pence               | **** | of
      shares    |      | of
      shares         |      | £000                   |      | of
      shares         |     
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|John
      Roberts    | 
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|                      |  | Ordinary       |      |         |      |                         |                     |            |                    |                  |      | 469.0               |      | 57,843             |      | 57,843                  |      | 366.7                   |      | 24,039                  |     
|2003/04               |  |                |      | 29.9.03 |      | 1.4.03
      to 31.3.06 |                     | 80         |                    | 360.0            |      |                     |      |                    |      |                         |      |                         |      |                         |     
|                      |  | A
      shares |      |         |      |                         |                     |            |                    |                  |      | 276.0               |      | 32,135             |      | 32,135                  |      | 145.6                   |      | (32,135                 | )   
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|                      |  | Ordinary       |      |         |      |                         |                     |            |                    |                  |      | 527.0               |      | 51,885             |      | 51,885                  |      | 328.9                   |      | 21,562                  |     
|2004/05               |  |                |      | 18.8.04 |      | 1.4.04
      to 31.3.07 |                     | 80         |                    | 384.0            |      |                     |      |                    |      |                         |      |                         |      |                         |     
|                      |  | A
      shares |      |         |      |                         |                     |            |                    |                  |      | 341.25              |      | 28,825             |      | 28,825                  |      | 130.6                   |      | (28,825                 | )   
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|2005/06               |  | Ordinary       |      | 30.6.05 |      | 1.4.05
      to 31.3.08 |                     | 80         |                    | 403.2            |      | 657.5               |      | 61,324             |      |                        |      |                        |      | 61,324                  |     
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|Total                 |  |                |      |         |      |                         |                     |            |                    | 1,147.2          |      |                     |      |                    |      |                         |      | 971.8                   |      | 106,925                 |     
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|Philip
      Green    |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|2005/06               |  | Ordinary       |      | 13.2.06 |      | 1.4.05
      to 31.3.08 |                     | 80         |                    | 540.0            |      | 688.5               |      | 78,432             |      |                        |      |                        |      | 78,432                  |     
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|Total                 |  |                |      |         |      |                         |                     |            |                    | 540.0            |      |                     |      | 78,432             |      |                        |      |                        |      | 78,432                  |     
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|Simon
      Batey     |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|                      |  | Ordinary       |      |         |      |                         |                     |            |                    |                  |      | 469.0               |      | 38,556             |      | 38,556                  |      | 244.4                   |      | 16,023                  |     
|2003/04               |  |                |      | 29.9.03 |      | 1.4.03
      to 31.3.06 |                     | 80         |                    | 240.0            |      |                     |      |                    |      |                         |      |                         |      |                         |     
|                      |  | A
      shares |      |         |      |                         |                     |            |                    |                  |      | 276.0               |      | 21,420             |      | 21,420                  |      | 97.0                    |      | (21,420                 | )   
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      | 547.0               |      | 35,658             |      | 35,658                  |      | 226.1                   |      | 14,819                  |     
|2004/05               |  | Ordinary       |      | 30.6.04 |      | 1.4.04
      to 31.3.07 |                     | 80         |                    | 264.0            |      |                     |      |                    |      |                         |      |                         |      |                         |     
|                      |  | A
      shares |      |         |      |                         |                     |            |                    |                  |      | 347.75              |      | 19,810             |      | 19,810                  |      | 89.7                    |      | (19,810                 | )   
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|2005/06               |  | Ordinary       |      | 30.6.05 |      | 1.4.05
      to 31.3.08 |                     | 80         |                    | 277.2            |      | 657.5               |      | 42,160             |      |                        |      |                        |      | 42,160                  |     
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|Total                 |  |                |      |         |      |                         |                     |            |                    | 781.2            |      |                     |      |                    |      |                         |      | 657.2                   |      | 73,002                  |     
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|Charlie
      Cornish |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      | 490.0               |      | 28,710             |      | 28,710                  |      | 182.0                   |      | 11,931                  |     
|2003/04               |  | Ordinary       |      | 7.1.04  |      | 1.4.03
      to 31.3.06 |                     | 80         |                    | 188.0            |      |                     |      |                    |      |                         |      |                         |      |                         |     
|                      |  | A
      shares |      |         |      |                         |                     |            |                    |                  |      | 297.0               |      | 15,950             |      | 15,950                  |      | 72.3                    |      | (15,950                 | )   
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|                      |  | Ordinary       |      |         |      |                         |                     |            |                    |                  |      | 547.0               |      | 25,407             |      | 25,407                  |      | 161.1                   |      | 10,558                  |     
|2004/05               |  |                |      | 30.6.04 |      | 1.4.04
      to 31.3.07 |                     | 80         |                    | 188.0            |      |                     |      |                    |      |                         |      |                         |      |                         |     
|                      |  | A
      shares |      |         |      |                         |                     |            |                    |                  |      | 347.75              |      | 14,115             |      | 14,115                  |      | 63.9                    |      | (14,115                 | )   
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|2005/06               |  | Ordinary       |      | 30.6.05 |      | 1.4.05
      to 31.3.08 |                     | 80         |                    | 200.0            |      | 657.5               |      | 30,419             |      |                        |      |                        |      | 30,419                  |     
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|Total                 |  |                |      |         |      |                         |                     |            |                    | 576.0            |      |                     |      |                    |      |                         |      | 479.3                   |      | 52,908                  |     
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|Tom
      Drury       |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      | 547.0               |      | 21,888             |      | 21,888                  |      | 138.8                   |      | 9,096                   |     
|2004/05               |  | Ordinary       |      | 30.6.04 |      | 1.4.04
      to 31.3.07 |                     | 60         |                    | 162.0            |      |                     |      |                    |      |                         |      |                         |      |                         |     
|                      |  | A
      shares |      |         |      |                         |                     |            |                    |                  |      | 347.75              |      | 12,160             |      | 12,160                  |      | 55.1                    |      | (12,160                 | )   
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|2005/06               |  | Ordinary       |      | 30.6.05 |      | 1.4.05
      to 31.3.08 |                     | 80         |                    | 248.0            |      | 657.5               |      | 37,719             |      |                        |      |                        |      | 37,719                  |     
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|Total                 |  |                |      |         |      |                         |                     |            |                    | 410.0            |      |                     |      |                    |      |                         |      | 193.9                   |      | 46,815                  |     
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|Gordon
      Waters   |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|                      |  | Ordinary       |      |         |      |                         |                     |            |                    |                  |      | 469.0               |      | 29,565             |      | 29,565                  |      | 187.4                   |      | 12,286                  |     
|2003/04               |  |                |      | 29.9.03 |      | 1.4.03
      to 31.3.06 |                     | 80         |                    | 184.0            |      |                     |      |                    |      |                         |      |                         |      |                         |     
|                      |  | A
      shares |      |         |      |                         |                     |            |                    |                  |      | 276.0               |      | 16,425             |      | 16,425                  |      | 74.4                    |      | (16,425                 | )   
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|                      |  | Ordinary       |      |         |      |                         |                     |            |                    |                  |      | 547.0               |      | 30,258             |      | 30,258                  |      | 191.8                   |      | 12,574                  |     
|2004/05               |  |                |      | 30.6.04 |      | 1.4.04
      to 31.3.07 |                     | 80         |                    | 224.0            |      |                     |      |                    |      |                         |      |                         |      |                         |     
|                      |  | A
      shares |      |         |      |                         |                     |            |                    |                  |      | 347.75              |      | 16,810             |      | 16,810                  |      | 76.1                    |      | (16,810                 | )   
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|2005/06               |  | Ordinary       |      | 30.6.05 |      | 1.4.05
      to 31.3.08 |                     | 80         |                    | 235.2            |      | 657.5               |      | 35,772             |      |                        |      |                        |      | 35,772                  |     
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     
|Total                 |  |                |      |         |      |                         |                     |            |                    | 643.2            |      |                     |      |                    |      |                         |      | 529.7                   |      | 60,632                  |     
|                      |  |                |      |         |      |                         |                     |            |                    |                  |      |                     |      |                    |      |                         |      |                         |      |                         |     

|Notes: |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | The
      values shown for 1 April 2005 have been calculated using the mid-market
      price of a share at close of business on that date (634 pence (ordinary
      share) and 453 pence (A share)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|      | The
      values shown for 31 March 2006 have been calculated using the mid-market
      price of an ordinary share at close of business on that date of 689.5 pence.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|      | The
      contingent scheme interest awarded during the year for the 2003/04 and 2004/05
      awards was an adjustment in the number of shares in awards to take account
      of the second stage of the rights issue. The number of ordinary shares increased
      by a factor of 1.41559048 and the number of A shares reduced
      to zero. This reflects the position of shareholders taking up their rights
      and took account of the subscription cost.                                                                                                                                                                                                                                                                                                                                                   
|      | The
      market price of a share at award is the mid-market price of an ordinary
      or A share at close of business on the last trading day immediately
      prior to the award date. This is used to calculate the maximum number of
      shares comprised in the award.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|      | John
      Roberts 2004/05 award was part of a special grant to five executives
      whose awards could not be made until a rule change relating to retirement
      had been approved at the 2004 annual general meeting. The market prices
      of an ordinary and A share at the date of their awards were
      527.0 pence and 341.25 pence respectively. However, as disclosed in the
      note accompanying the resolution to the annual general meeting, to ensure
      that the beneficiaries of the rule change were treated neither more nor
      less favourably than participants in the main grant, the maximum number
      of shares in their awards was calculated using the market prices of 547.0
      pence (ordinary share) and 347.75 pence (A share) applicable
      to the main grant.
|      | Philip
      Greens 2005/06 award was granted on the date he joined the group.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|      | Details
      of the criteria used for grants under the performance share plan are on
      pages 46 and 47. Tom Drurys 2004/05 award was granted prior to his
      joining the board. The performance conditions for the 2004/05 award set
      out on page 47 apply to 50 per cent of his award. The vesting of the other
      50 per cent is subject to performance against cumulative EBITA and average
      ROCE targets over the three years from 1 April 2004 to 31 March 2007 set
      out in the business plan for Vertex Data Science Limited agreed immediately
      before the start of the performance period. There is a sliding scale of
      vesting.                                                                                                                                             



|United
          Utilities Annual Report & Accounts 2006 | 49
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|                                         |  |  |           
|---------------------------------------- |  |  | ----------
|Directors remuneration report continued |  |  | Governance
|                                         |  |  |           

(e) 2002/03 grantDuring
    the year, awards granted under the 2002/03 plan vested. The extent to which
    awards vested was based on the companys TSR performance relative to
    the comparator group of companies over the period 1 April 2002 to 31 March
    2005. At the beginning of the performance period the comparator group comprised
    the following 18 companies in addition to United Utilities: AWG, BAA, BG Group,
    Boots Company, British Energy, Centrica, International Power, J Sainsbury,
    Kelda Group, Lattice Group, Morrisons, National Grid Group, Safeway, Scottish
    & Southern Energy, Scottish Power, Severn Trent, Tesco and Viridian. Lattice
    Group was subsequently excluded from the comparator group following its merger
    with National Grid Group. National Grid Group continued as National Grid Transco.
    The takeover bid for Safeway and the delisting of British Energy occurred
    after the first three months of the performance period. Both were retained
    in the comparator group.


United
        Utilities TSR performance relative to them was compared from the
        beginning of the performance period until the day before the takeover
        activity announcement (Safeway) and the de-listing (British Energy). United
    Utilities TSR for the performance period was 39.9 per cent which placed
    it fifth out of 18, resulting in 97 per cent of the maximum award vesting
    and three per cent lapsing. The remuneration committee was satisfied that
    the TSR performance was consistent with the companys underlying business
    performance. In particular, performance exceeded the earnings per share, dividend
    cover and interest cover targets for 2004/05 set out in the groups five-year
    business plan to 2006/07. The awards, therefore, vested in accordance with
    the companys relative TSR performance. Further details of directors
    scheme interests in the performance share plan, vested during the year, are
    set out in table 27.




Table 27: Executive directors scheme interests in the performance share plan vested during the year (audited information)

|                    |         |  |                 |  |            |  |                 |  |                     |  |                       |  |                       |  |                  |  | Contingent          |  |                       |  |       |  |                  |  |       | 
|------------------- | ------- |  | --------------- |  | ---------- |  | --------------- |  | ------------------- |  | --------------------- |  | --------------------- |  | ---------------- |  | ------------------- |  | --------------------- |  | ----- |  | ---------------- |  | ----- | 
|                    |         |  |                 |  |            |  |                 |  |                     |  |                       |  |                       |  |                  |  | scheme              |  |                       |  |       |  |                  |  |       | 
|                    |         |  |                 |  |            |  |                 |  |                     |  |                       |  |                       |  |                  |  | interest            |  | Contingent            |  |       |  |                  | 
|                    |         |  |                 |  |            |  |                 |  |                     |  |                       |  |                       |  | Contingent       |  | lapsed              |  | scheme
      interest |  |       |  |                  | 
|                    |         |  |                 |  |            |  |                 |  |                     |  |                       |  | scheme
      interest |  | during           |  | vested
      during |  | Value
      of award  | 
|                    |         |  |                 |  |            |  |                 |  | Award
      details |  | at
      1 April 2005 |  | the
      year        |  | the
      year   |  | at
      exercise   | 
|                    |         |  |                 |  |            |  |                 |  |                     |  |                       |  |                       |  |                  |  |                     | 
|                    |         |  |                 |  |            |  |                 |  | Market              |  |                       |  |                       |  |                  |  |                     |  |                       |  |       |  | Market           |  |       | 
|                    |         |  |                 |  |            |  | Max
      value |  | price               |  |                       |  |                       |  |                  |  |                     |  |                       |  |       |  | price
      of a |  |       | 
|                    |         |  |                 |  |            |  | at
      award  |  | of
      a share    |  |                       |  |                       |  |                  |  |                     |  |                       |  |       |  | share
      at   |  |       | 
|                    | Award   |  | Performance     |  | %
      of |  | date            |  | at
      award      |  | Max.
      no.        |  | Max.
      no.        |  | Max.
      value |  | No.
      of        |  | No.
      of          |  | Value |  | exercise         |  | Value | 
|                    | date    |  | period          |  | salary     |  | £000           |  | pence               |  | of
      shares       |  | of
      shares       |  | £000            |  | shares              |  | shares                |  | £000 |  | Pence            |  | £000 | 
|                    |         |  |                 |  |            |  |                 |  |                     |  |                       |  |                       |  |                  |  |                     |  |                       |  |       |  |                  |  |       | 
|John
      Roberts  |         |  |                 |  |            |  |                 |  |                     |  |                       |  |                       |  |                  |  |                     |  |                       |  |       |  |                  |  |       | 
|                    |         |  |                 |  |            |  |                 |  |                     |  |                       |  |                       |  |                  |  |                     |  |                       |  |       |  |                  |  |       | 
|2002/03             | 1.10.02 |  | 1.4.02
      to |  |            |  |                 |  |                     |  |                       |  |                       |  |                  |  |                     |  |                       |  |       |  |                  |  |       | 
|                    |         |  | 31.3.05         |  | 80         |  | 360.0           |  | 587.5               |  | 61,276                |  | 70,872                |  | 449.3            |  | 2,127               |  | 68,745                |  | 470.9 |  | 676.62           |  | 465.1 | 
|                    |         |  |                 |  |            |  |                 |  |                     |  |                       |  |                       |  |                  |  |                     |  |                       |  |       |  |                  |  |       | 
|Simon
      Batey   |         |  |                 |  |            |  |                 |  |                     |  |                       |  |                       |  |                  |  |                     |  |                       |  |       |  |                  |  |       | 
|                    |         |  |                 |  |            |  |                 |  |                     |  |                       |  |                       |  |                  |  |                     |  |                       |  |       |  |                  |  |       | 
|2002/03             | 1.10.02 |  | 1.4.02
      to |  |            |  |                 |  |                     |  |                       |  |                       |  |                  |  |                     |  |                       |  |       |  |                  |  |       | 
|                    |         |  | 31.3.05         |  | 80         |  | 240.0           |  | 587.5               |  | 40,851                |  | 47,248                |  | 299.6            |  | 1,418               |  | 45,830                |  | 313.9 |  | 676.62           |  | 310.1 | 
|                    |         |  |                 |  |            |  |                 |  |                     |  |                       |  |                       |  |                  |  |                     |  |                       |  |       |  |                  |  |       | 
|Gordon
      Waters |         |  |                 |  |            |  |                 |  |                     |  |                       |  |                       |  |                  |  |                     |  |                       |  |       |  |                  |  |       | 
|                    |         |  |                 |  |            |  |                 |  |                     |  |                       |  |                       |  |                  |  |                     |  |                       |  |       |  |                  |  |       | 
|2002/03             | 1.10.02 |  | 1.4.02
      to |  |            |  |                 |  |                     |  |                       |  |                       |  |                  |  |                     |  |                       |  |       |  |                  |  |       | 
|                    |         |  | 31.3.05         |  | 80         |  | 184.0           |  | 587.5               |  | 31,319                |  | 36,224                |  | 229.7            |  | 1,087               |  | 35,137                |  | 240.7 |  | 676.62           |  | 237.7 | 
|                    |         |  |                 |  |            |  |                 |  |                     |  |                       |  |                       |  |                  |  |                     |  |                       |  |       |  |                  |  |       | 

|Notes:
|------
|     
|     
|     
|     
|     



|50 | United
        Utilities Annual Report & Accounts 2006
|-- | ------------------------------------------------------

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Performance graphChart
    2 compares the companys annual total shareholder return (TSR) performance
    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 performance share plan. 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 2001. Chart
  2: Total shareholder returnSource: Thompson Financial


Share optionsGrants
    of executive share options were made under the company share option plan 1999
    up to and including 2002. From 2003, awards under the performance share plan
    have replaced further grants of executive share options. Executive
    directors are eligible to participate in the all-employee SAYE scheme (ShareSave).
    Neither the award nor the exercise of ShareSave options is dependent upon
    the satisfaction of performance conditions. The last grant of options was
    ShareSave 2004. Details of their interest in ShareSave options and Tom Drurys
interest in executive share options are shown in table 28.




Table 28: Directors interests in options (audited information)

|                              |                  |  |                       |  |                       |  |                   |  | Exercise
      price |  |                  |  |                 | 
|----------------------------- | ---------------- |  | --------------------- |  | --------------------- |  | ----------------- |  | -------------------- |  | ---------------- |  | --------------- | 
|                              | At
      1 April |  | Granted/(lapsed)      |  | Exercised             |  | At
      31 March |  | per
      share      |  | First
      date |  | Last
      date | 
|                              | 2005             |  | during
      the year |  | during
      the year |  | 2006              |  | pence                |  | exercisable      |  | exercisable     | 
|                              |                  |  |                       |  |                       |  |                   |  |                      |  |                  |  |                 | 
|Simon
      Batey             |                  |  |                       |  |                       |  |                   |  |                      |  |                  |  |                 | 
|                              |                  |  |                       |  |                       |  |                   |  |                      |  |                  |  |                 | 
|ShareSave
      2004          | 1,751            |  |                      |  |                      |  | 1,751             |  | 396.0
      p        |  | 01.03.2007       |  | 31.08.2007      | 
|                              |                  |  |                       |  |                       |  |                   |  |                      |  |                  |  |                 | 
|Total                         | 1,751            |  |                      |  |                      |  | 1,751             |  |                      |  |                  |  |                 | 
|                              |                  |  |                       |  |                       |  |                   |  |                      |  |                  |  |                 | 
|Tom
      Drury               |                  |  |                       |  |                       |  |                   |  |                      |  |                  |  |                 | 
|                              |                  |  |                       |  |                       |  |                   |  |                      |  |                  |  |                 | 
|ShareSave
      2003          | 303              |  |                      |  | 303                   |  |                  |  | 423.66
      p       |  | 01.03.2006       |  | 31.08.2006      | 
|                              |                  |  |                       |  |                       |  |                   |  |                      |  |                  |  |                 | 
|Executive
      share options | 3,469            |  |                      |  | 3,469                 |  |                  |  | 505.36
      p       |  | 20.12.1998       |  | 19.12.2005      | 
|                              |                  |  |                       |  |                       |  |                   |  |                      |  |                  |  |                 | 
|Total                         | 3,772            |  |                      |  | 3,772                 |  |                  |  |                      |  |                  |  |                 | 
|                              |                  |  |                       |  |                       |  |                   |  |                      |  |                  |  |                 | 
|Gordon
      Waters           |                  |  |                       |  |                       |  |                   |  |                      |  |                  |  |                 | 
|                              |                  |  |                       |  |                       |  |                   |  |                      |  |                  |  |                 | 
|ShareSave
      2002          | 2,648            |  |                      |  |                      |  | 2,648             |  | 432.3
      p        |  | 01.03.2007       |  | 31.08.2007      | 
|                              |                  |  |                       |  |                       |  |                   |  |                      |  |                  |  |                 | 
|ShareSave
      2003          | 382              |  |                      |  | 382                   |  |                  |  | 423.66
      p       |  | 01.03.2006       |  | 31.08.2006      | 
|                              |                  |  |                       |  |                       |  |                   |  |                      |  |                  |  |                 | 
|Total                         | 3,030            |  |                      |  | 382                   |  | 2,648             |  |                      |  |                  |  |                 | 
|                              |                  |  |                       |  |                       |  |                   |  |                      |  |                  |  |                 | 

|Notes:
|------
|     
|     
|     
|     



|United
          Utilities Annual Report & Accounts 2006 | 51
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|                                             |  |           
|-------------------------------------------- |  | ----------
|Directors remuneration
    report continued |  | Governance
|                                             |  |           



Executive
      directors shareholdingsExecutive
      directors are expected to build up and retain a target shareholding equal
      to the value of their basic salary, normally within five years of appointment.
      Performance share plan awards are delivered in shares and executives can
      retain all the shares that vest if they make a cash payment to meet their
      PAYE statutory liabilities. 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
      which vest under its incentive plans. Executive directors interests
      in shares, as at 31 March 2006, are listed in table 14 of the directors report
      on page 38. The value of these interests relative to their yearly salaries
are shown in table 29 below. Matched
    share investment scheme for Philip GreenPhilip Green commenced
    employment with the company on 13 February 2006 and was appointed as a director
of the company on 20 February 2006. As part
    of the terms of his recruitment, the company has agreed to establish a matched
    share investment scheme. This is a long-term incentive scheme under which
    Philip Green is the sole participant. Full details of the scheme are set
    out below. The arrangement was introduced specifically to facilitate Philip
    Greens recruitment. The company considered the circumstances of his
    recruitment were such that it was important and necessary to introduce these
    arrangements to attract him as the new chief executive officer and to retain
him up to and beyond the implementation of the next regulatory reviews. Philip
    Green first became eligible to participate in the scheme upon commencement
of his employment on 13 February 2006. The principal terms are:
   he
       agreed to acquire, at the start of his contract and at his expense, shares
       in the company to the value of his annual salary and has invested in 100,000
    shares in the company, (Investment Shares);
   the
       company has agreed to match the Investment Shares on a one for one basis
       by making a matching share award which will take the form of a nil cost
       option over
100,000 shares in the company (Matched Shares);
   the exercise price payable under the option shall be zero;
   in normal circumstances, the option will be capable of being exercised by Philip Green at the end of a five year period commencing from the date he joined the
company provided that:


(a)
    he
        has maintained throughout this period a shareholding in the company of
        at least the number of Investment Shares; and(b)
    he
        remains an employee within the group for the whole of the five-year period; 
   the number of shares subject to the matching share award will be increased by the notional reinvestment of dividends payable on the Matched Shares over the
course of the five-year period;
   in the event that Philip Green ceases to be an employee because of ill health or there is a change of control at any time during this five-year period, or he is
dismissed without cause during years four and five, the number of shares over which his matching share award (including those notionally added by way of dividend reinvestment as mentioned above) may be exercised will be reduced on the basis of a
time pro-rating depending on how much of the five-year period has elapsed as at the date of such cessation of employment or change of control;
   the matching award will be exercisable for a period of six months after the end of the five-year period and will lapse if not exercised by then. This period may
be extended if Philip Green is prevented from exercising because of restrictions in place under the model code operated by the company;
   the matching share award will not be capable of assignment and until it is exercised, Philip Green will have no right to vote in respect of the shares subject
to the matching share award;
   shares transferred pursuant to the exercise of the matching share award will rank pari passu in all respects with the shares in the company already in issue;
and
   in the event of any increase or variation in the share capital of the company, the remuneration committee may recommend such adjustment to the matching share
award as it considers reasonable.The provisions under the scheme for Philip Green which relate to:
   the person to whom the matching share award may be made;
   the limits on the number of shares which may be used under the scheme;
   the maximum entitlement of Philip Green;
   the
       basis for determining Philip Greens entitlement to the matching
    share award or shares pursuant to it; and
   the basis for determining the adjustment of the matching share award granted under the scheme following any increase or variation in the share capital of the
company


Table
29: Executive directors shareholdings

|                |                  |  |                 |  | Value of           |  |                  | 
|--------------- | ---------------- |  | --------------- |  | ------------------ |  | ---------------- | 
|                |                  |  | Value of        |  | shareholding       |  |                  | 
|                | Yearly salary at |  | shareholding at |  | relative to yearly |  |                  | 
|                | 31 March 2006    |  | 31 March 2006   |  | salary             |  | Target to be     | 
|                | £000            |  | £000           |  | %                  |  | achieved by      | 
|                |                  |  |                 |  |                    |  |                  | 
|John Roberts    | 540.0            |  | 1,301.6         |  | 241.0              |  | 1 September 2004 | 
|Philip Green    | 675.0            |  | 680.7           |  | 100.8              |  | 13 February 2011 | 
|Simon Batey     | 371.0            |  | 863.1           |  | 232.6              |  | 1 April 2005     | 
|Charlie Cornish | 290.0            |  | 2.3             |  | 0.8                |  | 27 January 2009  | 
|Tom Drury       | 310.0            |  | 152.7           |  | 49.2               |  | 9 May 2010       | 
|Gordon Waters   | 315.0            |  | 517.5           |  | 164.3              |  | 1 June 2002      | 
|                |                  |  |                 |  |                    |  |                  | 

|Note:                                                                                                                                                                            
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| The
        value of the shareholding is based on a share price of 680.7 pence. This
        is the share price averaged over the final three months of the financial
    year.



|52 | United
        Utilities Annual Report & Accounts 2006
|-- | ------------------------------------------------------

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cannot be amended to the advantage of Philip Green without the prior approval of the shareholders in General Meeting (except for minor amendments to benefit the administration of
  the long-term incentive scheme, to take into account any change in legislation or to obtain or maintain favourable tax, exchange control or regulatory treatment for Philip Green or the company or members of its group). The benefits to Philip Green under the scheme are not pensionable. The company believes that this arrangement and particularly the time period it relates to, which extends beyond the implementation of the next regulatory reviews, is a forceful
alignment of interests between Philip Green and shareholders. Pension arrangementsSeveral pension schemes operate within the group. The group, with trustee agreement where required, has made the rule changes necessary to ensure that the schemes qualify as
registered pension schemes under the new legislative regime. The executive directors are all members of the United Utilities Pension Scheme (UUPS). The remuneration committee recognises that pension is an important but potentially costly element of remuneration. Decisions have previously been made to close entry to the defined
benefit section of UUPS to newly-recruited directors and other senior executives, not to introduce any new unfunded unapproved arrangements to provide pension benefits above those approved by HM Revenue & Customs and to close entry to the
defined benefit executive section (which provides enhanced benefits for existing scheme members). Newly-recruited executive directors may join the defined contribution section of UUPS. They may make a regular contribution of up to seven per cent of basic pay and may make
additional voluntary contributions. The company contributes up to 25 per cent of basic pay. Changes to pensions policyDuring
the year the remuneration committee considered further the groups pensions
policy, in particular in relation to the potential impact of legislative changes
introduced
in April 2006. It made or re-affirmed the following decisions: 
   no compensation will be paid to a member in respect of additional tax payable on benefits paid by the pension scheme from funds in excess of the lifetime
allowance;
   when executives reach the lifetime allowance they will be given the choice of continuing to accrue benefits within the pension scheme (and pay the higher tax
charge) or be paid a cash allowance instead of accruing further pension benefits;
   at 6 April 2006 seven current executives had unfunded arrangements. All are members of the defined benefit section of UUPS. They have been given three months
from 6 April 2006 to decide whether to transfer the value of part or all of their accrued unfunded benefit into the registered pension scheme or continue with the unfunded arrangement. They may also choose whether all future fund accrual should be
within the registered scheme or any benefits in excess of those generated within the lifetime allowance should accrue under the unfunded arrangement or whether they wish to be paid a cash allowance instead of accruing pension benefits in the pension
scheme or the unfunded arrangement when they reach the lifetime allowance;



   cash allowances would be paid as a percentage of salary. They would be based on the maximum employer contribution of either the standard 14 per cent or enhanced
25 per cent, where appropriate, for members of the defined contribution section or an average employers contribution of 28 per cent for members of the defined benefit section. These percentages are to be adjusted so that cash allowances do not
result in increased cost to the group. Currently, this results in cash allowances of 12 per cent (standard defined contribution), 22 per cent (enhanced defined contribution) and 25 per cent (defined benefit); and
   from 6 April 2006, the directors regular contribution rates are levied on their pensionable pay, provided the amount for the year, when added to the
companys contribution, does not exceed the annual allowance. In 2005/06, their regular contributions were limited to £15,840 a year which was 15 per cent of the earnings cap. Directors pension arrangementsPhilip Green and Charlie Cornish are members of the defined contribution section. Philip Green contributes three per cent of basic salary. The company contributes six per cent of
  basic salary to the pension scheme and an additional 19 per cent to his private pension plan. Charlie Cornish contributes seven per cent and the company contributes 25 per cent of his basic salary to the pension scheme. The normal pension age is
  65. Simon Batey, Tom Drury and Gordon Waters are members of the defined benefit section which is now closed to new executives. John Roberts was a member until his retirement on 31
March 2006. The scheme provides a pension for them on normal retirement at age 60 based on a maximum accrual rate of 1/30th of pensionable earnings for each completed year of service. The maximum pension is two-thirds of pensionable earnings. Early
retirement is possible from age 50 if the company agrees. In the event of early retirement, pension benefits are actuarially reduced. Simon Batey contributes five per cent and Tom Drury and Gordon Waters six per cent of their pensionable pay to the
pension scheme. John Roberts contributed five per cent. In 2005/06, their contributions were subject to a maximum of £15,840, which was 15 per cent of the earnings cap. Pension benefits are calculated on basic salary only. Tom Drury and Gordon
Waters previously had a contractual entitlement to a pensionable bonus. Their bonus is no longer pensionable. To partially offset the reduction in their pensionable pay calculation, their pension benefits are based on notional pensionable pay of
1.225 and 1.3 times their basic pay respectively. Unfunded unapproved pension arrangementsArising from previous policy, the company put in place unfunded unapproved arrangements for John Roberts, Simon Batey, Tom Drury and Gordon Waters (and a limited number of other
senior executives), the intention of which was to provide pension benefits calculated on the same basis as for executives whose pensionable earnings were not limited by the earnings cap. At 31 March 2005, there were 26 unfunded arrangements in place. Ten related to current executives, five to deferred pensioners and 11 to pension benefits in payment. During the
year, the committee decided to offer to deferred pensioners and those in receipt of pension benefits the option to transfer within three months from 6 April 2006 part or all of their unfunded arrangement to the registered pension scheme. Those in
receipt of pension benefits have also been offered until 6 July 2006 the facility to exchange their ongoing unfunded benefits for a cash lump sum.




|United
          Utilities Annual Report & Accounts 2006 | 53
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|                                             |  |  |           
|-------------------------------------------- |  |  | ----------
|Directors remuneration
    report continued |  |  | Governance
|                                             |  |  |           

Table 30: Executive directors pension benefits (defined benefit scheme) (audited information)

|              | Accumulated total accrued |  |                |  |                                             |     |                          |  |                |     | Accumulated total accrued |    
|------------- | ------------------------- |  | -------------- |  | ------------------------------------------- | --- | ------------------------ |  | -------------- | --- | ------------------------- | ---
|              | pension at 1 April 2005   |  |                |  | Increase in accrued pension during the year |     | pension at 31 March 2006 | 
|              |                           |  |                |  |                                             |     |                          |  |                |     |                           |    
|              |                           |  |                |  |                                             |     |                          |  | Transfer value |     | Total change              |    
|              |                           |  |                |  |                                             |     |                          |  | of increase    |     | in transfer value         |    
|              |                           |  |                |  | Increase net                                |     | Member                   |  | (net of member |     | (net of member            |    
|              |                           |  | Transfer value |  | of inflation                                |     | contributions            |  | contributions) |     | contributions)            |    
|              | £000
    p.a.            |  | £000          |  | £000
    p.a.                              | (1) | £000                    |  | £000          | (2) | £000                     | (3)
|              |                           |  |                |  |                                             |     |                          |  |                |     |                           |    
|John Roberts  | 91.9                      |  | 1,682.4        |  | 21.2                                        |     | 15.8                     |  | 437.3          |     | 704.1                     |    
|Simon Batey   | 56.6                      |  | 781.5          |  | 14.3                                        |     | 15.8                     |  | 214.5          |     | 364.1                     |    
|Tom Drury     | 105.0                     |  | 1,062.4        |  | 15.9                                        |     | 15.8                     |  | 181.5          |     | 446.1                     |    
|Gordon Waters | 111.2                     |  | 1,977.8        |  | 18.7                                        |     | 15.8                     |  | 359.4          |     | 657.4                     |    
|              |                           |  |                |  |                                             |     |                          |  |                |     |                           |    

|Notes:
|------
|     
|     
|     
|     
|     
|     
|     



By 31 March 2006
five former executives had taken up the offer of a cash lump sum resulting in
payments totalling £2,805,700. At that date, there were 22 unapproved
arrangements in place. Nine related to current executives, four to deferred pensioners
and nine to pension benefits in payment. The offer to exchange benefits for a
cash lump sum will also be made to current executives with unfunded arrangements
for
a time-limited period when their benefits first become payable. Further information on payments made during the year and the total cost of the unfunded arrangements is given in note 19 to the accounts. Directors accrued
pension benefitsThe pension benefits earned by directors in the defined benefit scheme during the year are shown in table 30. During the year
ended 31 March 2006, the company paid contributions for Charlie Cornish totalling £56,875
(2005: £34,125)
to the defined contribution section of
UUPS. The total amounts
set aside or accrued by the company or its subsidiaries in 2005/06 to provide
pension, retirement or similar benefits for all directors and members of the
executive leadership team as a group was £2,892,427. Contracts of service and compensation for terminationThe
companys policy is that the executive directors and executive officers normally have one-year notice periods. The company may offer a longer notice period if it considers
that necessary to recruit a new director or executive officer. If it offers an initial notice period of more than one year, it will usually reduce that to a rolling one-year notice period after the initial period has expired. Philip Greens
contract provides for an initial notice period of 24 months which will reduce to 12 months rolling notice after one years
service. The other current executive directors have one-year notice periods. Contracts terminate automatically upon the director reaching age 65 (Simon Batey, Tom Drury and Gordon Waters: 60) unless the company 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 may 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 company; performance share plan vesting is at the discretion
of the trustees based on a recommendation from the remuneration committee. A
payment will
not normally be made 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 (modified if appropriate) being satisfied. The committee will
apply such mitigation 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. Its policy is to take a robust line on reducing compensation. It may phase payments to reflect a departing employees obligation to mitigate loss. The committee reviews this policy each year.
No changes were made during the year. Details of directors and senior managers contracts
are set out in table 31. Simon Batey will
be leaving the company on 31 July 2006. His contract provides for a notice period
of one year in line with company policy. It is anticipated that he will continue
to work for the company and be paid normally in accordance with his contract
until the end of July 2006 to provide the opportunity to effect a smooth transition.
Thereafter, he will not be required to work the balance of his notice period.
His
pension benefits will be calculated as if he had worked for the company until
31 January 2007 and his life and medical cover will continue until that date.
He will receive a cash lump sum of £192,500 (less statutory deductions
as appropriate) in lieu of the balance of his basic pay and car allowance. His
annual bonus and performance share plan awards for 2004/05 and 2005/06 will be
pro-rated in accordance with the rules of those plans and remain subject to the
performance conditions
associated with them.




|54 | United
        Utilities Annual Report & Accounts 2006
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Table
  31: Executive directors and senior managers service contracts as
  at 31 March 2006

|                      |  |                        |  | Unexpired
      term      |  |                                                                                              |  |                                                                                       | 
|--------------------- |  | ---------------------- |  | ------------------------- |  | -------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- | 
|                      |  | Date
      of contract |  | (to
      60th birthday*) |  | Notice
      period                                                                          |  | Contractual
      compensation upon early termination                                 | 
|                      | 
|Philip
      Green    |  | 13.02.06               |  | 12.05.18                  |  | Initially
      24 months reducingto
      12 months (rolling) afterone
      years service |  | No
         explicit provision (other than paymentfor
          outstanding holidays) | 
|                      | 
|John
      Roberts    |  | 01.09.99               |  |                          |  | 12
      months (rolling)                                                                    |  | No
         explicit provision (other than paymentfor
          outstanding holidays) | 
|                      | 
|Simon
      Batey     |  | 01.04.00               |  |                          |  | 12
      months (rolling)                                                                    |  | No
         explicit provision (other than paymentfor
          outstanding holidays) | 
|                      | 
|Charlie
      Cornish |  | 05.01.04               |  | 30.11.24                  |  | 12
      months (rolling)                                                                    |  | No
         explicit provision (other than paymentfor
          outstanding holidays) | 
|                      | 
|Tom
      Drury       |  | 09.05.05               |  | 14.09.21                  |  | 12
      months (rolling)                                                                    |  | No
         explicit provision (other than paymentfor
          outstanding holidays) | 
|                      | 
|Gordon
      Waters   |  | 01.03.96               |  | 06.06.07                  |  | 12
      months (rolling)                                                                    |  | No
         explicit provision (other than paymentfor
          outstanding holidays) | 
|                      | 
|Linda
      Booth     |  | 01.01.03               |  | 09.10.12                  |  | 12
      months (rolling)                                                                    |  | No
         explicit provision (other than paymentfor
          outstanding holidays) | 
|                      | 
|Ian
      Priestner   |  | 16.10.00               |  | 20.04.17                  |  | 12
      months (rolling)                                                                    |  | No
         explicit provision (other than paymentfor
          outstanding holidays) | 
|                      | 
|Tim
      Rayner      |  | 01.04.98               |  | 04.08.20                  |  | 12
      months (rolling)                                                                    |  | No
         explicit provision (other than paymentfor
          outstanding holidays) | 
|                      | 

|Notes:
|------
|     
|     
|     
|     

SENIOR
      MANAGERS During
     the year, the aggregate amount of emoluments paid to senior managers (see
    page
  37) was £1,509,504 (2005: £2,245,355). This includes basic
  pay, benefits in kind and annual bonuses earned and accrued in the year to
  31  March 2006. Details of their emoluments for the year are included, on a
  banded
  basis, in table 32. Table 32: Senior managers emoluments Total
        emoluments £0001
    450.0+
    350.0
       449.92
    250.0
       349.92
    <250.0 Notes:
    The
      above table includes data for Tom Drury prior to his appointment to the
      board on 9 May 2005 and Hugh Logan who left the company on 26 February 2006. Approved
  by the board of directors on 31 May 2006 and signed on its behalf by David
JonesRemuneration committee chairman






|United
          Utilities Annual Report & Accounts 2006 | 55
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|                                  |  |  |           
|--------------------------------- |  |  | ----------
|Corporate
      governance report |  |  | Governance
|                                  |  |  |           



The
  Combined CodeUnited
  Utilities PLC is subject to the Combined Code on Corporate Governance as updated
  in 2003 (the Combined Code). Throughout the year, the board has
  complied fully with the revised Combined Code and this report, together with
  the remuneration report on pages 41 to 55, give details of how these principles
  have been applied. The
        board of directorsEvery
        company should be headed by an effective board, which is collectively
        responsible for the success of the company. (Combined Code principle
        A.1) The board
  is scheduled to meet ten times each year with additional meetings called if
  required. 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. In addition, it is responsible for business planning and risk management
  and for the development of group policies including such areas as health and
  safety, directors and senior managers remuneration and on social,
  environmental and ethical issues. Attendance by individual directors at scheduled
  meetings of the board and its committees during the year ended 31 March 2006
  is shown in table 33 and full biographical details of the directors can be found
  on pages 35 to 37. The chairman
  holds meetings with the non-executive directors without the executive directors
  present. Led by the senior independent director, the non-executive directors
  meet without the chairman present at least annually to appraise the chairmans
  performance. Directors have a right to ensure that any concerns they have, which
  cannot be resolved 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,
  for circulation to the board, if they have any such concerns. The groups
  governance structure ensures that all decisions are made by the most appropriate
  people in such a way that the decision-making process itself does not unnecessarily
  delay progress. The board has formally delegated specific responsibilities to
  board committees, including the audit (see page 60), remuneration (see page
  42), nomination (see Appointments to the board on page 57), approvals
  and treasury committees. All board committees are provided with sufficient resources
  to undertake their duties. The approvals
  committee considers and approves expenditure and investment proposals within
  limits delegated by the board. Its members are the executive directors and the
  company secretary. The treasury
  committee considers and approves borrowing, leasing, bonding and other banking
  facilities within limits set by the board. Its members are the chairman and
  the executive directors together with, for more significant or complex transactions,
  one other non-executive director. The directors
  of subsidiary companies are legally responsible for those business entities.
  They are tasked with the delivery of the targets set within the budgets approved
  by the group board and for the implementation of group strategy and policy across
  their businesses. United Utilities Water PLC, for example, is a substantial
  business in its own right and its board includes two independent non-executive
  directors (Phillida Entwistle and Deborah Morton).


The company
    maintains an appropriate level of directors and officers insurance. Chairman
        and chief executive officerThere
        should be a clear division of responsibilities at the head of the company
        between the running of the board and the executive responsibility for
        the running of the companys business. No one individual should have
        unfettered powers of decision. (Combined Code principle A.2) Separate
    individuals have been appointed to the positions of chairman and of the chief
    executive officer. The board has agreed clearly defined responsibilities for
    the roles and has adopted a set of guiding principles to govern the relationship
    between them. The chairman is primarily responsible for the working of the
    board. The chief executive officer is responsible for running the groups
    business and for implementing board strategy and policy. Board
        balance and independenceThe
        board should include a balance of executive and non-executive directors
        (and in particular independent non-executive directors) such that no individual
        or small group of individuals can dominate the boards decision taking.
        (Combined Code principle A.3) The board
  aims to maintain a balance of executive and non-executive directors and, at
  the date of adoption of this statement, comprises the chairman, five executive
  directors and seven non-executive directors determined by the board to be independent
  in accordance with the Combined Code. The directors have a wide and diverse
  range of business and other experience and expertise. The Code
  does not regard the chairman as being independent in view of his unique role
  in corporate governance although, were he not chairman, Sir Richard Evans would
  satisfy the independence criteria laid down by the Code. Taking into account
  the provisions of the Code, the board has determined that all of the non-executive
  directors are independent and free from any business or other relationship which
  could compromise their independent judgement. In particular, the board has determined
  that Sir Peter Middleton remains independent, notwithstanding that he has served
  on the board for more than nine years. Andrew Pinder remains independent, notwithstanding
  that he received additional remuneration during the year under review as a non-executive
  director of Vertex, from which he retired on 31 March 2006. In making these
  determinations, the board took into account their breadth of experience, their
  financial independence and their other business interests. Sir Peter
  Middleton has been appointed as senior independent director. The senior independent
  director would be available to shareholders if they have concerns which contact
  through the normal channels has failed to resolve or for which such contact
  is inappropriate. The terms of reference for the senior independent director
  are available on the companys website but include: the authority to call
  a meeting of the non-executive directors if, in his opinion, it is necessary;
  to lead a meeting of the non-executive directors without the chairman present
  at least annually to appraise the chairmans performance; and to attend
  sufficient meetings with a range of major shareholders to listen to their views
  in order to help develop a balanced understanding of their issues and concerns.




|56 | United
    Utilities Annual Report & Accounts 2006
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Table 33: Attendance by individual directors at scheduled meetings of the board in the year to 31 March 2006

|                          |          |  | Board  |  |          |  | Audit  |  |          |  | Nomination |  |          |  | Remuneration | 
|------------------------- | -------- |  | ------ |  | -------- |  | ------ |  | -------- |  | ---------- |  | -------- |  | ------------ | 
|                          |          |  |        |  |          |  |        |  |          |  |            |  |          |  |              | 
|                          | Possible |  | Actual |  | Possible |  | Actual |  | Possible |  | Actual     |  | Possible |  | Actual       | 
|                          |          |  |        |  |          |  |        |  |          |  |            |  |          |  |              | 
|                          |          |  |        |  |          |  |        |  |          |  |            |  |          |  |              | 
|Philip
      Green        | 2        |  | 2      |  | n/a      |  | n/a    |  | 0        |  | 0          |  | n/a      |  | n/a          | 
|John
      Roberts        | 10       |  | 10     |  | n/a      |  | n/a    |  | 6        |  | 5          |  | n/a      |  | n/a          | 
|Simon
      Batey         | 10       |  | 10     |  | n/a      |  | n/a    |  | n/a      |  | n/a        |  | n/a      |  | n/a          | 
|Charlie
      Cornish     | 10       |  | 10     |  | n/a      |  | n/a    |  | n/a      |  | n/a        |  | n/a      |  | n/a          | 
|Tom
      Drury           | 9        |  | 9      |  | n/a      |  | n/a    |  | n/a      |  | n/a        |  | n/a      |  | n/a          | 
|Gordon
      Waters       | 10       |  | 10     |  | n/a      |  | n/a    |  | n/a      |  | n/a        |  | n/a      |  | n/a          | 
|Sir
      Richard Evans   | 10       |  | 10     |  | n/a      |  | n/a    |  | 6        |  | 6          |  | n/a      |  | n/a          | 
|Norman
      Broadhurst   | 10       |  | 9      |  | 4        |  | 4      |  | 6        |  | 5          |  | 6        |  | 6            | 
|Paul
      Heiden         | 5        |  | 4      |  | 2        |  | 2      |  | 4        |  | 3          |  | 3        |  | 3            | 
|David
      Jones         | 10       |  | 9      |  | 4        |  | 3      |  | 6        |  | 4          |  | 6        |  | 5            | 
|Sir
      Peter Middleton | 10       |  | 9      |  | 4        |  | 2      |  | 6        |  | 5          |  | 6        |  | 5            | 
|Jane
      Newell         | 10       |  | 9      |  | 4        |  | 4      |  | 6        |  | 6          |  | 6        |  | 6            | 
|Andrew
      Pinder       | 10       |  | 9      |  | 2        |  | 1      |  | 6        |  | 6          |  | 6        |  | 6            | 
|Nick
      Salmon         | 10       |  | 9      |  | 4        |  | 3      |  | 6        |  | 6          |  | 6        |  | 4            | 
|John
      Seed           | 4        |  | 4      |  | 2        |  | 2      |  | 1        |  | 1          |  | 3        |  | 3            | 
|                          |          |  |        |  |          |  |        |  |          |  |            |  |          |  |              | 
|

|Notes:
|------
|     
|     
|     
|     
|     
|     
|      

Appointments
        to the boardThere
        should be a formal, rigorous and transparent procedure for the appointment
        of new directors to the board. (Combined Code principle A.4) The board
  has constituted a nomination committee which meets at least once each year and
  otherwise as required. The committee considers and makes recommendations to
  the board on the composition, balance and membership of the board. Its members
  are the non-executive directors, including the chairman (who is chairman of
  the committee, although the chairman will not chair the committee when the committee
  deals with the appointment of a successor to the chairmanship) together with
  the chief executive officer. As such, the majority of the members of the committee
  are non-executive directors determined by the board to be independent in accordance
  with the Combined Code. The nomination committees terms of reference are
  available to shareholders on request and are also available on the companys
  website at www.unitedutilities.com. The nomination
  committee evaluates the balance of skills, knowledge and experience on the board
  and, in the light of this evaluation, prepares a description of the roles and
  capabilities required for a particular appointment. The nomination
  committee leads the process for board appointments and makes recommendations
  to the board about filling vacancies on the board, appointing additional persons
  to the board and the reappointment by shareholders of any director under the
  retirement by rotation provisions in the companys articles of association.
  The committee considers and makes recommendations to the board from time to
  time on the boards composition and balance. The committee met seven times
  in the year to 31 March 2006. During the year, the committee prepared a description
  of the roles and capabilities required for the appointment of a chief executive
  officer, a chief financial officer and a non-executive director, engaged the
  services of Whitehead


Mann
    and made recommendations to the board as part of the final selection process
    which led to the appointment of Philip Green as the new chief executive officer,
    Tim Weller as the new chief financial officer and Paul Heiden as a non-executive
    director. The
    letters of appointment of non-executive directors are made available for inspection
    and are available on the companys website. They set out the expected
    time commitment and non-executive directors undertake that they will have
    sufficient time to meet what is expected of them. Non-executive directors
    other significant commitments are disclosed to the board before appointment,
    with the board being notified of any subsequent changes. The
    company 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 company. Subject to board approval (which will not be given if the
    proposed appointment is with a competing company, would otherwise lead to
    a 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 fees. John Roberts served as a non-executive
    director of Volex Group plc until September 2005 for which he earned and retained
    a fee of £13,000. In the same month, John Roberts was appointed as a
    non-executive director to the board of Royal Bank of Canada Europe Limited
    for which he earned a fee of £29,167 during the year under review. Simon
    Batey is a non-executive director of Arriva plc, for which he earned and retained
    a fee of £40,000 during the year to 31 March 2006. Simon Batey also
    represents the group as a non-executive director of THUS Group plc due to
    its investment in this company. This directorship is unpaid.




|United
          Utilities Annual Report & Accounts 2006 | 57
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|                                            |  |  |           
|------------------------------------------- |  |  | ----------
|Corporate
      governance report continued |  |  | Governance
|                                            |  |  |           



Information
        and professional developmentThe
      board should be supplied in a timely manner with information in a form and
      of a quality appropriate to enable it to discharge its duties. All directors
      should receive induction on joining the board and should regularly update
      and refresh their skills and knowledge. (Combined Code principle A.5) The quality
  of the contribution that directors, particularly non-executives, can make is
  directly dependent upon the quality of the information they receive. Accordingly,
  all directors receive comprehensive information on a regular basis. Board papers
  are normally distributed five days in advance of the relevant meeting to allow
  sufficient time for directors to be fully briefed. The papers are sufficiently
  detailed to enable the directors to obtain a thorough grasp of the management
  and financial performance of the company and the operating businesses. Minutes
  of committee meetings are circulated to all board members. The board
  has established a governance framework which encourages all directors to bring
  an independent judgement to bear on issues of strategy, performance and resources,
  including key appointments and standards of conduct. New directors receive appropriate
  induction on joining the board. As part of this, the company has offered to
  major shareholders the opportunity to meet Philip Green as the new chief executive
  officer and Paul Heiden as a new non-executive director. All directors
  have access to the advice and services of the company secretary, who is responsible
  to the board for ensuring that board procedures are complied with. The appointment
  and removal of the company secretary are matters for the board as a whole. 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. Performance
        evaluationThe
      board should undertake a formal and rigorous annual evaluation of its own
      performance and that of its committees and individual directors. (Combined
      Code principle A.6) 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 last years and which was modelled on the Chairmens
  Guide to the Board Performance Review published by the Chairmens Forum
  and is consistent with guidance published by the Institute of Chartered Secretaries
  and Administrators. Each director was required to score the boards performance
  on 64 issues, such as contribution to strategy, risk management, financial and
  operational reporting, board committees, matters reserved for the board, communication,
  company and board advisers, relations with the groups regulators and board
  procedures and invited additional comments. In addition,
  the members of the audit, nomination and remuneration committees completed additional
  confidential questionnaires about the functioning of those committees, as did
  those managers and advisers who deal with those committees frequently. For example,
  in the case of the audit committee, the auditors and the group audit manager
  each completed confidential questionnaires about the audit committee.


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 on the summary report, after which the chairman reported
  back to the whole board on the evaluation process. The board has developed a
  plan to reduce unnecessary bureaucracy by streamlining the groups approval
  processes and to review board committee structures to better match those committees
  requirements with directors expertise. 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. Reappointment
        of directorsAll
      directors should be submitted for re-election at regular intervals, subject
      to continued satisfactory performance. The board should ensure planned and
      progressive refreshing of the board. (Combined Code principle A.7) The board
  initially appoints all new directors, upon the recommendation of the nomination
  committee and following an appropriate recruitment process. Following the appointment
  of a new director, he or she is required to retire and seek reappointment at
  the next annual general meeting. The companys articles of association
  include provisions requiring one-third of all directors to retire and seek reappointment
  at each annual general meeting, and ensuring that no director serves for more
  than three years without retiring and being proposed for re-appointment at an
  annual general meeting. Biographical
  details of directors being submitted for appointment or reappointment are set
  out in the notes accompanying the relevant notice of meeting. Non-executive
  directors are appointed for specified terms subject to reappointment under the
  companys articles of association and subject to Companies Acts provisions
  relating to the removal of a director. In the papers accompanying a resolution
  to elect a non-executive director, the board explains to shareholders why it
  believes that each non-executive director should be elected. The chairman will
  confirm to shareholders when proposing reappointment that, following formal
  performance evaluation, that individuals performance continues to be effective
  and demonstrates 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 longer than nine years will be subject to annual reappointment. Financial
        reportingThe
      board should present a balanced and understandable assessment of the companys
      position and prospects. (Combined Code principle C.1) In presenting
  the annual and interim financial statements and similar significant publications,
  the directors aim to present a balanced and understandable assessment of the
  groups position and prospects. The company produces a consolidated UK
  and US compliant annual report and Form 20-F which it hopes will provide a single
  source of information about the company.




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The board
  recognises that the majority of shareholders elect not to receive the full annual
  report and to receive in its place a summary financial statement. Accordingly,
  it has taken steps to ensure that such shareholders also receive a stakeholder
  report which summarises the most important features of the companys activity
  during the year. The directors
  have adopted the going concern basis in preparing these financial statements.
  This is based upon a review of the groups budget for 2006/07, the five-year
  business plan and investment programme, together with the cash and committed
  borrowing facilities available to the group. The board also took into account
  potential contingent liabilities and other risk factors as interpreted by the
  Guidance on Going Concern and Financial Reporting for Directors of Listed
  Companies registered in the United Kingdom, published in November 1994. As at
  31 March 2006, an evaluation was carried out under the supervision, and with
  the participation of senior management, including the chief executive officer
  and chief financial officer, of the effectiveness of the design and operation
  of the companys disclosure controls and procedures. There are inherent
  limitations to the effectiveness of any system of disclosure controls and procedures,
  including the possibility of human error and the circumvention or overriding
  of the controls and procedures. Accordingly, even effective disclosure controls
  and procedures can only provide reasonable assurance of achieving their control
  objectives. Based on, and as of the date of the companys evaluation, the
  chief executive officer and chief financial director concluded that the disclosure
  controls and procedures are effective. In addition,
  there has been no change in the companys internal controls or in other
  factors, during the period covered by this annual report, that has materially
  affected, or is reasonably likely to materially affect, the disclosure controls. Statement
    of directors responsibilitiesThe
    directors are responsible for preparing the annual report and the financial
    statements. The directors are required to prepare financial statements for
    the group in accordance with International Financial Reporting Standards (IFRS)
    and have also elected to prepare financial statements for the company in accordance
    with IFRS. Company law requires the directors to prepare such financial statements
    in accordance with IFRS, the Companies Act 1985 and Article 4 of the lAS Regulation. International
  Accounting Standard 1 requires that financial statements present fairly for
  each financial year the companys financial position, financial performance
  and cash flows. This requires the faithful representation of the effects of
  transactions, other events and conditions in accordance with the definitions
  and recognition criteria for assets, liabilities, income and expenses set out
  in the International Accounting Standards Boards Framework for the
  Preparation and Presentation of Financial Statements. In virtually all
  circumstances, a fair presentation will be achieved by compliance with all applicable
  International Financial Reporting Standards. Directors are also required to: 
    properly
      select and apply accounting policies;
    present
      information, including accounting policies, in a manner that provides relevant,
      reliable, comparable and understandable information; and



    provide
      additional disclosures when compliance with the specific requirements in
      IFRS is insufficient to enable users to understand the impact of particular
      transactions, other events and conditions on the entitys financial
      position and financial performance. The directors
  are responsible for keeping proper accounting records which disclose with reasonable
  accuracy at any time the financial position of the company, for safeguarding
  the assets, for taking reasonable steps for the prevention and detection of
  fraud and other irregularities and for the preparation of a directors
  report and directors remuneration report which comply with the requirements
  of the Companies Act 1985. The directors
  are responsible for the maintenance and integrity of the company website. Legislation
  in the United Kingdom governing the preparation and dissemination of financial
  statements may differ from legislation in other jurisdictions. Internal
        controlThe
      board should maintain a sound system of internal control to safeguard shareholders
      investment and the companys assets. (Combined Code principle
      C.2) The board
  is responsible for the groups system of internal controls and for reviewing
  its effectiveness. Throughout the year under review and up to the date of this
  report, the board has operated procedures meeting the requirements of the Combined
  Code relating to internal control as set out in the September 1999 guidance
  Internal Control Guidance for Directors on the Combined Code published
  by the Institute of Chartered Accountants in England and Wales. Each year the
  board reviews all controls, including financial, operational and compliance
  controls and risk management procedures. The internal control system is designed
  to manage, rather than to eliminate, the risk of failure to achieve the companys
  business objectives and can only provide reasonable, and not absolute, assurance
  against material misstatement or loss. In addition,
  the board is making preparations for compliance with section 404 of the US Sarbanes-Oxley
  Act of 2002. This includes ensuring that key financial controls are adequately
  documented and that they have been specifically tested. The key
  features of the internal control system are: 
    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 year ahead
      and projections for subsequent years;
    a
      monthly board review of financial and non-financial performance to assess
      progress towards objectives;
    monthly
      meetings prior to each board meeting of the executive leadership team, a
      forum in which the executive directors, the managing directors of the groups
      businesses, the group functional directors and the company secretary exchange
      information and discuss strategic and operational issues which are of group-wide
      importance;




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|Corporate
      governance report continued |  |  | Governance
|                                            |  |  |           




    regular
      monitoring of risks and control systems throughout the year by the operating
      businesses, supported by the use of risks and issues databases;
    a
      self-certification process, subject to internal audit, whereby the operating
      businesses are required to confirm that the system of internal control is
      operating effectively;
    an
      internal audit function to provide independent scrutiny of internal control
      systems and risk management procedures;
    a
      bi-monthly risk management forum chaired by the group finance director,
      and comprising the company secretary, the group audit manager, the group
      health and safety manager and senior representatives from each of the operating
      businesses, to scrutinise key risks;
    quarterly
      meetings, involving expert external advisers, to discuss the companys
      social and environmental performance and impacts, recommend targets and
      monitor performance. The role of the panel is to advise on environmental
      policy and, in particular, to identify risks to the environment, recommend
      targets and monitor performance against those targets. Due to its importance
      to the group, sustainable development will form part of the executive leadership
      teams agenda with effect from the 2006/07 financial year;
    an
      annual risk assessment exercise involving self-assessment by management
      of all business risks in terms of impact, likelihood and control strength
      and an objective challenge of that assessment by the internal audit team;
    health
      and safety performance reviews carried out by our in-house safety professionals
      in addition to the normal health and safety risk assessment and management
      processes carried out within each of the operating businesses;
    centralised
      treasury operations operating within defined limits and subject to regular
      reporting requirements and internal audit reviews; and
    established
      procedures, set out in a group 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. The
        audit committee and the auditorsThe
      board should establish formal and transparent arrangements for considering
      how they should apply the financial reporting and internal control principles
      and for maintaining an appropriate relationship with the companys
      auditors. (Combined Code principle C.3) The audit
  committees members are the non-executive directors who are determined
  in accordance with UK and US corporate governance rules to be independent. Norman
  Broadhurst is its chairman and the board is satisfied that he has recent and
  relevant financial experience as required by the Combined Code and is an audit
  committee financial expert as defined by Item 16A of Form 20-F. The committee
  met four times in the year to 31 March 2006. The committee
  has primary responsibility for making a recommendation to the board, for it
  to put to shareholders


for their
  approval in general meeting, on the appointment, reappointment and removal of
  the external auditors and it keeps under review the scope and results of the
  external audit and its effectiveness and the independence and objectivity of
  the auditors. The committee has established policies and procedures to pre-approve
  the engagement of the auditors to provide any audit or non-audit services and
  keeps the nature and extent of non-audit services under review seeking to balance
  the maintenance of objectivity and value for money. It reviews
  the half year and annual financial statements and any formal announcements relating
  to financial performance before submission to the board, reviews periodically
  the scope, remit and effectiveness of the internal audit function and the effectiveness
  of the groups internal control system. It also reviews arrangements by
  which staff of the company may, in confidence, raise concerns about possible
  improprieties in matters of financial reporting or other matters. The board
  has decided that if it does not accept the audit committees recommendation,
  it should include in the annual report, and in any papers recommending appointment
  or reappointment, a statement from the audit committee explaining the recommendation
  and should set out reasons why the board has taken a different position. The board
  has adopted a revised disclosure policy which provides for a confidential mailbox
  for employees who want to report any concerns which they may have. The committees
  objective is to ensure that arrangements are in place for the proportionate
  and independent investigation of such matters and for appropriate follow-up
  action. The terms
  of reference of the audit committee are available to shareholders on request
  and are also are available on the companys website at www.unitedutilities.com. Audit
  and audit-related services are pre-approved annually by the audit committee.
  Audit-related services generally are 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 and their application, 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 audit and non-audit services
    policy and 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 2005/06, all services were
    pre-approved by the audit committee and none were undertaken without such
    pre-approval pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation
    S-X. The group
  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 auditor.




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The fees paid or payable to the auditors in the year under review are set out in table 34. Table
34: Fees to Deloitte & Touche LLP 2006
   
   2005£000
   
   £000Audit fees
   912.0
   
   590.0Audit related fees(1)
   687.0
   
   681.0Other assurance fees(2)
   850.0
   
   144.0Tax fees(3)
   15.0
   
   300.0Total
   2,464.0
   
   1,715.0 Notes:(1)
   Audit-related fees are fees billed for work on regulatory returns and assurance work reasonably related to the statutory audit, including due diligence and
assurance work, work associated with raising debt and equity finance and securities filing work including the second stage of the rights issue.(2)
   Other
       assurance fees include fees relating to the divestment of Your Communications
       and assistance with acquisitions.(3)
   Tax fees are fees incurred for tax compliance, tax advice and related tax work.(4)
   In addition to the above, fees relating to joint ventures of the group were paid to Deloitte & Touche LLP in 2006 totalling £52,400 (2005 
£15,000). Dialogue
    with institutional shareholdersThere
            should be a dialogue with institutional shareholders based on the
            mutual understanding of objectives. The board as a whole has responsibility
            for ensuring that a satisfactory dialogue with shareholders takes
            place. (Combined
Code principle D.1) There is a programme of 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 89 different funds, representing 42 per cent of the companys issued share capital. This, together with regular announcements of significant events affecting the group and frequent updates on current trading, emphasises the boards
commitment to keeping the companys equity and debt investors informed of developments affecting the group. The board regards this programme as important to improve investors awareness of the business and for the board to gain an
understanding of investors priorities. The board has taken steps to ensure that members of the board, and in particular the non-executive directors, develop an understanding of the views of major shareholders about
their company through an annual survey of shareholder opinion produced for the company by Makinson Cowell. Non-executive directors are offered the opportunity to attend meetings with major shareholders and would attend them if requested by major
shareholders. Constructive
    use of the annual general meetingThe
            board should use the annual general meeting to communicate with investors
            and to encourage their participation. (Combined Code principle
    D.2) The board encourages shareholders to exercise their right to vote at the annual general meeting. The notice calling the meeting and related papers are sent to shareholders at least
20 working days before the meeting and separate resolutions are proposed on each substantially separate issue. At annual general meetings, 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 Lloyds TSB Registrars.


Presentations are made on the progress and performance of the business prior to the formal business of the meeting. Shareholders are encouraged to participate through a question and answer session and individual directors or, where appropriate, the chairman of the relevant committee, respond to
those questions directly. Normally, the chairmen of the audit, nomination and remuneration committees will be available at the annual general meeting to answer questions relevant to the work of those committees. All directors normally attend the
annual general meeting. The interim report, the annual report, the stakeholder report and summary financial statement remain the primary means the board has of communicating during the year with all of
the companys shareholders. However, the board recognises the importance
of the internet as a means of communicating widely, quickly and cost-effectively.
A library of information about the company is available 24 hours a day, worldwide,
at www.unitedutilities.com. Financial news releases are made available on the
site contemporaneously with release through other news channels and anyone with
an email address can register free of charge to receive an email alert upon the
posting of
each new release. Differences in UK/NYSE corporate governance practicesUnder
the New York Stock Exchange (NYSE) corporate governance rules for
listed companies, as a NYSE-listed foreign private issuer, United Utilities PLC
must disclose any significant ways in which its corporate governance practices
differ from those followed by US companies under NYSE listing standards. United
Utilities PLC believes the following to be the significant differences between
its corporate governance
practices and NYSE corporate governance rules applicable to US companies. US companies listed on the NYSE are required to adopt and disclose corporate governance guidelines. The Listing Rules of the UK Financial Services Authority require each listed
company, incorporated in the United Kingdom, to include in its annual report and accounts a narrative statement of how it has applied the principles of the Combined Code and a statement as to whether or not it has complied with the best practice
provisions of the Combined Code throughout the accounting period covered by the annual report and accounts. A company that has not complied with the Combined Code provisions, or complied with only some of the Combined Code provisions or (in the case
of provisions whose requirements are of a continuing nature) complied for only part of an accounting period covered by the report, must specify the Combined Code provisions with which it has not complied, and, where relevant, for what part of the
reporting period such non-compliance continued, and give reasons for any non-compliance. United Utilities PLC has complied throughout its 2005/06 financial year with the best practice provisions of the Combined Code. The Combined Code does not
require United Utilities PLC to disclose the full range of corporate governance guidelines with which it complies. Under NYSE standards, companies are required to have a nominating/corporate governance committee, composed entirely of independent directors. In addition to identifying individuals
qualified to become board members, this committee must develop and recommend to the board a set of corporate governance principles. The United Utilities nomination committee, which follows the requirements of the Combined Code, includes seven
members who are independent under Combined Code rules (six of whom are also deemed independent under NYSE rules), together




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|Corporate
        governance report continued |  |  | Governance
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with the
    non-executive chairman and the chief executive officer. The committees
    terms of reference do not require the committee to develop and recommend corporate
    governance
  principles for United Utilities PLC. Pursuant to NYSE
listing standards, non-management directors must meet on a regular basis without
management present and independent directors must meet separately at least once
per year. During the 2005/06 financial year, United Utilities non-executive
directors met once as a group with the non-executive chairman, but with no executive
directors present and once as a group without the chairman or the executive directors
present. In accordance with
the requirements of the Combined Code, United Utilities reports on how its committees
and its directors are evaluated and on the results of such evaluations and it
provides extensive information regarding directors compensation in the directors remuneration report on pages 41 to 55. The terms of reference of United Utilities audit, nomination and remuneration committees are available on
the companys website. NYSE listing standards
require US companies to adopt a code of business conduct and ethics for directors,
officers and employees, and to disclose promptly any waivers of the code for
directors or executive officers. The group has adopted a set of business principles,
which applies to the employees of all United Utilities companies, including the
chief executive officer, the chief financial officer and the group financial
controller which comply with the NYSE requirements. United Utilities Business Principles are available on the companys
website. Under NYSE listing rules applicable to US companies, independent directors must comprise a majority of the board of directors. The NYSE rules
include detailed tests for determining director independence while the Combined
Code, which is followed by United Utilities, prescribes a more general standard
for
determining director independence. Currently, six of United Utilities non-executive
directors satisfy the tests for independence set out in the NYSE rules. The Combined Code
requires a companys board to assess director independence by affirmatively
concluding that the director is independent of management and free from any business
or other relationship that could materially interfere with the exercise of independent
judgement. Finally, a chief
executive officer of a US company listed on the NYSE must annually certify that
he or she is not aware of any violation by the company of NYSE corporate governance
standards. In accordance with NYSE listing rules applicable to foreign private
issuers, United Utilities chief executive officer is not required to provide
the NYSE with this annual compliance certification. However, in accordance with
rules applicable to both US companies and foreign private issuers, the chief
executive officer will be required to notify the NYSE promptly in writing if
any executive officer becomes aware of any material non-compliance with the NYSE
corporate governance
standards applicable to United Utilities.




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    Utilities Annual Report & Accounts 2006
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| |                          | 
| | ------------------------ | 
| | Financial
    statements | 
| |                          | 
| |                          | 

|                                                           
|-----------------------------------------------------------
|Report
    Of Independent Registered Public Accounting Firm
|                                                           



We have
  audited the consolidated balance sheets of United Utilities PLC and subsidiaries
  (the Company) as of 31 March 2006 and 2005, and the related consolidated profit
and loss account and consolidated cash flow statements for each of the two years in the period ended 31 March 2006, as listed in the accompanying index. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on the financial statements
based on our audits. We conducted our
audits in accordance with standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. The Company is not required to have, nor were we engaged
to perform, an audit of its internal controls over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate for the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys
internal controls over financial reporting. Accordingly, we express no such opinion.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing
the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of United Utilities PLC and subsidiaries at 31 March 2006
and 2005, and the results of their operations and their cash flows for each of the two years in the period ended 31 March 2006 in conformity with International Financial Reporting Standards as adopted for use in the European Union. International Financial Reporting Standards as adopted for use in the European Union vary in certain significant respects from accounting principles generally accepted in the
United States of America. Information relating to the nature and effect of such differences is summarised in Note 33 to the consolidated financial statements as listed in the accompanying index. Deloitte & Touche
LLPManchester, United Kingdom


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| |                          | 
| | ------------------------ | 
| | Financial
    statements | 
| |                          | 
| |                          | 

|                                  |  |  |                                       
|--------------------------------- |  |  | --------------------------------------
|Consolidated
    income statement |  |  | Operating
        and financial review
|                                  |  |  |                                       

|for
    the year ended 31 March                      |      |  |          |   |          |  
|---------------------------------------------------- | ---- |  | -------- | - | -------- | -
|                                                     |      |  | 2006     |   | 2005     |  
|Continuing operations                                | Note |  | £m       |   | £m       |  
|                                                     |      |  |          |   |          |  
|Revenue                                              |      |  | 2,386.8  |   | 2,103.7  |  
|                                                     |      |  |          |   |          |  
|Other income                                         |      |  | 21.8     |   | 19.8     |  
|Employee benefits expense                            | 2    |  | (429.0   | ) | (392.8   | )
|Depreciation and amortisation expense                |      |  | (320.3   | ) | (330.7   | )
|Other operating costs                                |      |  | (893.8   | ) | (718.9   | )
|Restructuring costs                                  | 1    |  | (25.5    | ) | (29.7    | )
|                                                     |      |  |          |   |          |  
|Total operating expenses                             |      |  | (1,646.8 | ) | (1,452.3 | )
|                                                     |      |  |          |   |          |  
|Operating profit                                     | 3    |  | 740.0    |   | 651.4    |  
|                                                     |      |  |          |   |          |  
|Investment income                                    | 4    |  | 54.0     |   | 38.3     |  
|Finance expense:                                     |      |  |          |   |          |  
|Fair value loss on debt and derivative instruments   | 5    |  | (15.7    | ) |         |  
|Other finance expense                                | 5    |  | (339.0   | ) | (322.1   | )
|                                                     |      |  |          |   |          |  
|                                                     | 5    |  | (354.7   | ) | (322.1   | )
|                                                     |      |  |          |   |          |  
|Investment income and finance expense                |      |  | (300.7   | ) | (283.8   | )
|                                                     |      |  |          |   |          |  
|Profit before taxation                               |      |  | 439.3    |   | 367.6    |  
|Taxation                                             | 6    |  | (120.3   | ) | (96.1    | )
|                                                     |      |  |          |   |          |  
|Profit for the year from continuing operations       |      |  | 319.0    |   | 271.5    |  
|                                                     |      |  |          |   |          |  
|Discontinued operation                               |      |  |          |   |          |  
|Loss for the period/year from discontinued operation | 1,7  |  | (110.8   | ) | (9.4     | )
|                                                     |      |  |          |   |          |  
|Profit for the year                                  |      |  | 208.2    |   | 262.1    |  
|                                                     |      |  |          |   |          |  
|Attributable to:                                     |      |  |          |   |          |  
|Equity holders of the company                        |      |  | 207.9    |   | 260.3    |  
|Minority interest                                    |      |  | 0.3      |   | 1.8      |  
|                                                     |      |  |          |   |          |  
|                                                     |      |  | 208.2    |   | 262.1    |  
|                                                     |      |  |          |   |          |  
|Earnings per share                                   | 9    |  |          |   |          |  
|From continuing and discontinued operations          |      |  |          |   |          |  
|Basic                                                |      |  | 24.3     | p | 33.3     | p
|Diluted                                              |      |  | 24.2     | p | 30.1     | p
|From continuing operations                           |      |  |          |   |          |  
|Basic                                                |      |  | 37.3     | p | 34.5     | p
|Diluted                                              |      |  | 37.1     | p | 31.2     | p
|                                                     |      |  |          |   |          |  



|64 | United
        Utilities Annual Report & Accounts 2006
|-- | ------------------------------------------------------

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| |  |                         
| |  | ------------------------
| |  | Financial
    statements
| |  |                         

|                   |  |  | 
|------------------ |  |  | 
|                   |  |  | 
|Balance
    sheets |  |  | 
|                   |  |  | 

|at
    31 March                             |      |  |          |   |          |   |          |   |          |  
|------------------------------------------- | ---- |  | -------- | - | -------- | - | -------- | - | -------- | -
|                                            |      |  |          |   | Group    |   |          |   | Company  |  
|                                            |      |  |          |   |          |   |          |   |          |  
|                                            |      |  | 2006     |   | 2005     |   | 2006     |   | 2005     |  
|                                            | Note |  | £m       |   | £m       |   | £m       |   | £m       |  
|                                            |      |  |          |   |          |   |          |   |          |  
|Assets                                      |      |  |          |   |          |   |          |   |          |  
|Non-current assets                          |      |  |          |   |          |   |          |   |          |  
|Property, plant and equipment               | 10   |  | 8,543.9  |   | 8,474.5  |   | 0.8      |   | 0.8      |  
|Goodwill                                    | 11   |  | 153.1    |   | 100.6    |   |         |   |         |  
|Other intangible assets                     | 12   |  | 236.2    |   | 192.8    |   |         |   |         |  
|Investments                                 | 13   |  | 170.7    |   | 9.7      |   | 5,501.7  |   | 4,833.1  |  
|Trade and other receivables                 | 15   |  | 22.0     |   | 23.4     |   |         |   |         |  
|Retirement benefit surplus                  | 19   |  | 19.3     |   |         |   |         |   |         |  
|Deferred tax                                | 20   |  |         |   |         |   | 7.4      |   |         |  
|Derivative financial instruments            | 18   |  | 40.8     |   |         |   |         |   |         |  
|                                            |      |  |          |   |          |   |          |   |          |  
|                                            |      |  | 9,186.0  |   | 8,801.0  |   | 5,509.9  |   | 4,833.9  |  
|                                            |      |  |          |   |          |   |          |   |          |  
|Current assets                              |      |  |          |   |          |   |          |   |          |  
|Inventories                                 | 14   |  | 28.2     |   | 40.9     |   |         |   |         |  
|Trade and other receivables                 | 15   |  | 490.1    |   | 385.0    |   | 1,130.6  |   | 799.1    |  
|Investments                                 | 13   |  | 29.7     |   | 19.7     |   |         |   |         |  
|Cash and short-term deposits                | 16   |  | 1,513.5  |   | 902.7    |   | 120.4    |   | 353.9    |  
|Derivative financial instruments            | 18   |  | 48.9     |   |         |   |         |   |         |  
|                                            |      |  |          |   |          |   |          |   |          |  
|                                            |      |  | 2,110.4  |   | 1,348.3  |   | 1,251.0  |   | 1,153.0  |  
|                                            |      |  |          |   |          |   |          |   |          |  
|                                            |      |  |          |   |          |   |          |   |          |  
|                                            |      |  |          |   |          |   |          |   |          |  
|Total assets                                |      |  | 11,296.4 |   | 10,149.3 |   | 6,760.9  |   | 5,986.9  |  
|                                            |      |  |          |   |          |   |          |   |          |  
|                                            |      |  |          |   |          |   |          |   |          |  
|LIABILITIES                                 |      |  |          |   |          |   |          |   |          |  
|Non-current liabilities                     |      |  |          |   |          |   |          |   |          |  
|Trade and other payables                    | 22   |  | (383.7   | ) | (337.3   | ) |         |   |         |  
|Borrowings                                  | 17   |  | (5,081.1 | ) | (4,669.0 | ) | (880.9   | ) | (914.9   | )
|Retirement benefit obligations              | 19   |  |         |   | (84.6    | ) | (1.2     | ) | (8.2     | )
|Deferred tax                                | 20   |  | (1,426.6 | ) | (1,337.3 | ) |         |   | (3.1     | )
|Provisions                                  | 21   |  | (16.6    | ) |         |   |         |   |         |  
|Derivative financial instruments            | 18   |  | (57.6    | ) |         |   | (32.7    | ) |         |  
|                                            |      |  |          |   |          |   |          |   |          |  
|                                            |      |  |          |   |          |   |          |   |          |  
|                                            |      |  | (6,965.6 | ) | (6,428.2 | ) | (914.8   | ) | (926.2   | )
|                                            |      |  |          |   |          |   |          |   |          |  
|Current liabilities                         |      |  |          |   |          |   |          |   |          |  
|Trade and other payables                    | 22   |  | (855.1   | ) | (950.0   | ) | (550.8   | ) | (530.5   | )
|Borrowings                                  | 17   |  | (619.1   | ) | (512.3   | ) | (478.2   | ) | (212.1   | )
|Current income tax liabilities              |      |  | (112.8   | ) | (96.0    | ) |         |   |         |  
|Provisions                                  | 21   |  | (36.5    | ) | (18.4    | ) |         |   | (0.4     | )
|Derivative financial instruments            | 18   |  | (76.4    | ) |         |   | (5.8     | ) |         |  
|                                            |      |  |          |   |          |   |          |   |          |  
|                                            |      |  | (1,699.9 | ) | (1,576.7 | ) | (1,034.8 | ) | (743.0   | )
|                                            |      |  |          |   |          |   |          |   |          |  
|Total liabilities                           |      |  | (8,665.5 | ) | (8,004.9 | ) | (1,949.6 | ) | (1,669.2 | )
|                                            |      |  |          |   |          |   |          |   |          |  
|Total net assets                            |      |  | 2,630.9  |   | 2,144.4  |   | 4,811.3  |   | 4,317.7  |  
|                                            |      |  |          |   |          |   |          |   |          |  
|EQUITY                                      |      |  |          |   |          |   |          |   |          |  
|Capital and reserves attributable to equity |      |  |          |   |          |   |          |   |          |  
|holders of the company                      |      |  |          |   |          |   |          |   |          |  
|Share capital                               | 23   |  | 875.4    |   | 716.2    |   | 875.4    |   | 716.2    |  
|Share premium account                       | 23   |  | 1,407.8  |   | 1,038.7  |   | 1,407.8  |   | 1,038.7  |  
|Revaluation reserve                         | 23   |  | 158.8    |   | 158.8    |   |         |   |         |  
|Treasury shares                             | 23   |  | (0.3     | ) | (0.3     | ) | (0.3     | ) | (0.3     | )
|Cumulative exchange reserve                 | 23   |  | 2.2      |   | 3.7      |   | 5.2      |   | 1.1      |  
|Retained earnings                           | 23   |  | 185.3    |   | 226.0    |   | 2,523.2  |   | 2,562.0  |  
|                                            |      |  |          |   |          |   |          |   |          |  
|Shareholders equity                        |      |  | 2,629.2  |   | 2,143.1  |   | 4,811.3  |   | 4,317.7  |  
|Minority interest                           |      |  | 1.7      |   | 1.3      |   |         |   |         |  
|                                            |      |  |          |   |          |   |          |   |          |  
|Total equity                                |      |  | 2,630.9  |   | 2,144.4  |   | 4,811.3  |   | 4,317.7  |  
|                                            |      |  |          |   |          |   |          |   |          |  
|                                            |      |  |          |   |          |   |          |   |          |  

|Approved
    by the board of directors on 31 May 2006 and signed on its behalf by:
|----------------------------------------------------------------------------------
|                                                                                  
|Sir Richard Evans                                                                 
|Chairman                                                                          



|United
          Utilities Annual Report & Accounts 2006 | 65
|-------------------------------------------------------- | --

---



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| |                              | 
| | ---------------------------- | 
| | Financial
        statements | 
| |                              | 

|                                                |  |  |                                       
|----------------------------------------------- |  |  | --------------------------------------
|                                                |  |  |                                       
|Statements
    of recognised income and expense |  |  | Operating
        and financial review
|                                                |  |  |                                       

|for
    the year ended 31 March                             |      |  |       |   |       |   |       |   |         |  
|----------------------------------------------------------- | ---- |  | ----- | - | ----- | - | ----- | - | ------- | -
|                                                            |      |  |       |   | Group |   |       |   | Company |  
|                                                            |      |  |       |   |       |   |       |   |         |  
|                                                            |      |  | 2006  |   | 2005  |   | 2006  |   | 2005    |  
|                                                            | Note |  | £m    |   | £m    |   | £m    |   | £m      |  
|                                                            |      |  |       |   |       |   |       |   |         |  
|Actuarial gains/(losses) on defined benefit pension schemes | 19   |  | 119.2 |   | (10.1 | ) | 5.2   |   | (0.8    | )
|Revaluation of investments                                  | 13   |  | 14.6  |   |      |   |      |   |        |  
|Fair value loss on cashflow hedges                          |      |  | (0.9  | ) |      |   |      |   |        |  
|Foreign exchange adjustments                                |      |  | (1.5  | ) | 3.7   |   | 4.1   |   | 1.1     |  
|Tax on items taken directly to equity                       |      |  | (35.6 | ) | 3.0   |   | (1.6  | ) | 0.2     |  
|                                                            |      |  |       |   |       |   |       |   |         |  
|Net income/(expense) recognised directly in equity          |      |  | 95.8  |   | (3.4  | ) | 7.7   |   | 0.5     |  
|Profit/(loss) for the year                                  |      |  | 208.2 |   | 262.1 |   | 319.0 |   | (891.8  | )
|                                                            |      |  |       |   |       |   |       |   |         |  
|Total recognised income and expense for the year            |      |  | 304.0 |   | 258.7 |   | 326.7 |   | (891.3  | )
|                                                            |      |  |       |   |       |   |       |   |         |  
|                                                            |      |  |       |   |       |   |       |   |         |  
|Attributable to:                                            |      |  |       |   |       |   |       |   |         |  
|Equity holders of the company                               |      |  | 303.7 |   | 256.9 |   |       |   |         |  
|Minority interest                                           |      |  | 0.3   |   | 1.8   |   |       |   |         |  
|                                                            |      |  |       |   |       |   |       |   |         |  
|                                                            |      |  | 304.0 |   | 258.7 |   |       |   |         |  
|                                                            |      |  |       |   |       |   |       |   |         |  



|66 | United
        Utilities Annual Report & Accounts 2006
|-- | ------------------------------------------------------

---



Back to Contents

| |  |                           
| |  | --------------------------
| |  | Financial
      statements
| |  |                           
| |  |                           

|                          |  |  | 
|------------------------- |  |  | 
|Cashflow
      statements |  |  | 
|                          |  |  | 

for the year ended 31 March

|                                                                                     |      |  |          |   | Group   |   |        |   | Company |  
|------------------------------------------------------------------------------------ | ---- |  | -------- | - | ------- | - | ------ | - | ------- | -
|                                                                                     |      |  |          |   |         |   |        |   |         |  
|                                                                                     |      |  | **2006** |   | 2005    |   | 2006   |   | 2005    |  
|                                                                                     | Note |  | £m       |   | £m      |   | £m     |   | £m      |  
|                                                                                     |      |  |          |   |         |   |        |   |         |  
|Operating
      activities                                                           |      |  |          |   |         |   |        |   |         |  
|Cash
      generated from/(used in) operations                                       | 29   |  | 1,004.5  |   | 732.2   |   | (25.3  | ) | 342.0   |  
|Interest
      paid                                                                  |      |  | (344.1   | ) | (342.0  | ) | (66.5  | ) | (66.0   | )
|Interest
      received and similar income                                           |      |  | 66.2     |   | 67.0    |   | 12.5   |   | 18.8    |  
|Tax
      (paid)/received                                                            |      |  | (3.2     | ) | (1.7    | ) |       |   | 1.2     |  
|                                                                                     |      |  |          |   |         |   |        |   |         |  
|Net
      cash generated from/(used in) operating activities (continuing operations) |      |  | 723.4    |   | 455.5   |   | (79.3  | ) | 296.0   |  
|Net
      cash used in operating activities (discontinued operation)                 | 29   |  | (12.0    | ) | (15.9   | ) |       |   |        |  
|                                                                                     |      |  |          |   |         |   |        |   |         |  
|                                                                                     |      |  | 711.4    |   | 439.6   |   | (79.3  | ) | 296.0   |  
|                                                                                     |      |  |          |   |         |   |        |   |         |  
|Investing
      activities                                                           |      |  |          |   |         |   |        |   |         |  
|Acquisition
      of subsidiaries (net of cash and cash equivalents acquired)        | 24   |  | (102.4   | ) | (48.2   | ) | (25.3  | ) | (48.2   | )
|Financial
      restructuring of subsidiaries                                        |      |  |         |   |        |   | (559.0 | ) | (247.5  | )
|Disposal
      of subsidiaries                                                       | 29   |  |         |   | 64.8    |   |       |   |        |  
|Purchase
      of investments                                                        |      |  | (85.3    | ) |        |   |       |   |        |  
|Purchase
      of property, plant and equipment                                      |      |  | (598.2   | ) | (862.0  | ) |       |   |        |  
|Purchase
      of other intangible assets                                            |      |  | (31.6    | ) |        |   |       |   |        |  
|Proceeds
      from sale of property, plant and equipment                            |      |  | 34.1     |   | 14.2    |   |       |   |        |  
|Financial
      restructuring of joint ventures                                      |      |  | 13.2     |   | (8.3    | ) |       |   |        |  
|                                                                                     |      |  |          |   |         |   |        |   |         |  
|Net
      cash used in investing activities (continuing operations)                  |      |  | (770.2   | ) | (839.5  | ) | (584.3 | ) | (295.7  | )
|Net
      cash used in investing activities (discontinued operation)                 |      |  | (9.0     | ) | (12.6   | ) |       |   |        |  
|                                                                                     |      |  |          |   |         |   |        |   |         |  
|                                                                                     |      |  | (779.2   | ) | (852.1  | ) | (584.3 | ) | (295.7  | )
|                                                                                     |      |  |          |   |         |   |        |   |         |  
|Financing
      activities                                                           |      |  |          |   |         |   |        |   |         |  
|Proceeds
      from issue of ordinary shares                                         |      |  | 528.3    |   | 20.0    |   | 528.3  |   | 20.0    |  
|Proceeds
      from borrowings                                                       |      |  | 943.8    |   | 597.4   |   | 458.6  |   | 6.3     |  
|Repayment
      of borrowings                                                        |      |  | (473.3   | ) | (62.6   | ) | (212.1 | ) |        |  
|Dividends
      paid to equity holders of the company                                |      |  | (344.7   | ) | (317.5  | ) | (344.7 | ) | (317.5  | )
|                                                                                     |      |  |          |   |         |   |        |   |         |  
|Net
      cash generated from/(used in) financing activities (continuing operations) |      |  | 654.1    |   | 237.3   |   | 430.1  |   | (291.2  | )
|                                                                                     |      |  |          |   |         |   |        |   |         |  
|                                                                                     |      |  |          |   |         |   |        |   |         |  
|Effects
      of exchange rate changes                                               |      |  | (8.0     | ) | 0.9     |   |       |   |        |  
|                                                                                     |      |  |          |   |         |   |        |   |         |  
|Net
      increase/(decrease) in cash and cash equivalents (continuing operations)   |      |  | 599.3    |   | (145.8  | ) | (233.5 | ) | (290.9  | )
|Net
      decrease in cash and cash equivalents (discontinued operation)             |      |  | (21.0    | ) | (28.5   | ) |       |   |        |  
|Cash
      and cash equivalents at beginning of the year                             | 16   |  | 865.6    |   | 1,039.9 |   | 353.9  |   | 644.8   |  
|                                                                                     |      |  |          |   |         |   |        |   |         |  
|Cash
      and cash equivalents at end of the year                                   | 16   |  | 1,443.9  |   | 865.6   |   | 120.4  |   | 353.9   |  
|                                                                                     |      |  |          |   |         |   |        |   |         |  



|United
          Utilities Annual Report & Accounts 2006 | 67
|-------------------------------------------------------- | --

---



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| |                            | 
| | -------------------------- | 
| | Financial
      statements | 
| |                            | 
| |                            | 

|                          |  |  | 
|------------------------- |  |  | 
|Accounting
      policies |  |  | 
|                          |  |  | 



The principal
  accounting policies adopted in the preparation of these financial statements
  are set out below: a)
  Basis of preparationThe
  financial statements have been prepared for the first time in accordance with
  International Financial Reporting Standards (IFRS) as adopted for use in the
  European Union (EU), including International Accounting Standards (IAS) and
  Interpretations issued by the International Financial Reporting Interpretations
  Committee (IFRIC). Results for the comparative periods have been restated under
  IFRS as adopted for use in the EU. IFRS,
  as adopted by the EU, differs in certain respects from IFRS as issued by the
  International Accounting Standard Board (IASB). However, the considered financial
  statements for the periods presented would be no different had the group applied
  IFRS as issued by the IASB. References to IFRS hereafter should be construed
  as references to IFRS as adopted by the EU. The financial
  statements have been prepared on the historical cost basis, except for the revaluation
  of financial instruments. The preparation
  of financial statements, in conformity with generally accepted accounting principles
  under IFRS, requires management to make estimates and assumptions that affect
  the reported amounts of assets and liabilities at the date of the financial
  statements and the reported amounts of revenues and expenses during the reporting
  period. Although these estimates are based on managements best knowledge
  of the amount, event or actions, actual results ultimately may differ from these
  estimates. The disclosures
  required by IFRS 1 First-time Adoption of International Financial Reporting
  Standards concerning the transition from UK GAAP (United Kingdom generally
  accepted accounting practice) to IFRS are given in note 32. b)
  Basis of consolidationThe
  group financial statements consolidate the financial statements of the company
  and entities controlled by the company (its subsidiaries), made up to 31 March
  each year, and incorporate the results of its share of jointly controlled entities
  using proportionate consolidation. The results
  of subsidiaries and joint ventures acquired or disposed of during the year are
  included in the consolidated income statement from the effective date of acquisition
  or up to the effective date of disposal, as appropriate. Where
  necessary, adjustments are made to the financial statements of subsidiaries
  to bring the accounting policies used under the relevant local GAAP into line
  with those used by the group. Subsidiaries
  Control is achieved
  where the company has the power to govern the financial and operating policies,
  generally accompanied by a shareholding of more than one half of the voting
  rights, of an investee entity so as to obtain benefits from its activities. On acquisition,
  the assets and liabilities and contingent liabilities of a subsidiary are measured
  at their fair values at the date of acquisition. Any excess of the cost of acquisition
  over the fair values of the identifiable net assets acquired is recognised as
  goodwill. Any deficiency of the cost of acquisition below the fair values of
  the identifiable net assets acquired is credited to profit and loss in the period
  of acquisition. The interest of minority shareholders is stated at the minoritys
  proportion of the fair values of the assets and liabilities


recognised.
    Minority interests in the net assets of consolidated subsidiaries are identified
    separately from the groups equity therein. Minority interests consist
  of the amount of those interests at the date of the original business combination
  and the minoritys share of changes in equity since the date of the combination.
  Losses applicable to the minority in excess of the minoritys interest
  in the subsidiarys equity are allocated against the interests of the
  group except to the extent that the minority has a binding obligation and is
  able
  to make an additional investment to cover the losses. All intra-group
  transactions, balances, income and expenses are eliminated on consolidation. Associates
  An associate is
  an entity over which the group, either directly or indirectly, is in a position
  to exercise significant influence by participating in, but not controlling,
  the financial and operating policies of the entity. Associates are accounted
  for using the equity method. Losses of an associate in excess of the groups
  interest in the associate are not recognised, except to the extent that the
  group has incurred obligations in respect of the associate. Unrealised profits
  and losses recognised by the group on transactions with an associate are eliminated
  to the extent of the groups interest in the associate concerned. Joint
  ventures Joint ventures
  are entities in which the group holds an interest on a long-term basis and which
  are jointly controlled with one or more parties under a contractual arrangement.
  The groups share of joint venture income, expenses, assets, liabilities
  and cashflows are included in the consolidated financial statements on a proportionate
  consolidation basis using the same accounting methods as adopted for subsidiaries. c)
  Non-current assets held for saleNon-current
  assets (and disposal groups) classified as held for sale are measured at the
  lower of carrying amount and fair value less costs to sell. Non-current
  assets and disposal groups are classified as held for sale if their carrying
  amount will be recovered through a sale transaction rather than through continuing
  use. This condition is regarded as met only when the sale is highly probable
  and the asset (or disposal group) is available for immediate sale in its present
  condition. Management must be committed to the sale which should be expected
  to qualify for recognition as a completed sale within one year from the date
  of classification. d)
  Intangible assetsGoodwill
  Goodwill arising
  on consolidation (representing the excess of the fair value of the consideration
  and associated costs over the fair value of the identifiable net assets of an
  acquired subsidiary or joint venture at the date of acquisition) is recognised
  as an asset. Following
  initial recognition, goodwill is subject to impairment reviews, at least annually,
  and measured at initial value less accumulated impairment losses. Any impairment
  is recognised immediately in the income statement and is not subsequently reversed. On disposal
  of a subsidiary, or jointly controlled entity, the attributable amount of goodwill
  is included in the determination of the gain or loss on disposal.




|68 | United Utilities Annual Report & Accounts 2006
|-- | ----------------------------------------------

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| |  |                           
| |  | --------------------------
| |  | Financial
      statements
| |  |                           
| |  |                           

| |  |  | 
| |  |  | 
| |  |  | 
| |  |  | 



Goodwill
  written off to reserves under UK GAAP prior to 1998 has not been reinstated
  and is not included in determining any subsequent profit or loss on disposal. Other
  intangible assets Other intangible
  assets are measured initially at cost and are amortised on a straight-line basis
  over their estimated useful lives. Carrying amount is reduced by any provision
  for impairment where necessary. On a
  business combination, as well as recording separable intangible assets already
  recognised in the balance sheet of the acquired entity at their fair value,
  identifiable intangible assets that arise from contractual or other legal rights
  are also included in the acquisition balance sheet. Amortisation
  periods for categories of intangible assets are: Computer
  software 3-10 years 
  Other intangible assets 2-20 years e)
  Property, plant and equipmentProperty,
  plant and equipment comprises infrastructure assets (mains, sewers, impounding
  and pumped raw water storage reservoirs, dams, sludge pipelines and sea outfalls)
  and other assets (including properties, overground plant and equipment and electricity
  operational assets). Water
  and wastewater infrastructure assetsInfrastructure
  assets comprise a network of water and wastewater systems. Expenditure on the
  infrastructure assets relating to increases in capacity or enhancements of the
  network are treated as additions. Amounts incurred in maintaining the operating
  capability of the network in accordance with defined standards of service are
  expensed in the year in which the expenditure is incurred. Infrastructure assets
  are depreciated by writing off their deemed cost less the estimated residual
  value, evenly over their useful lives, which range from 15 to 300 years. Employee
  costs incurred in implementing the capital schemes of the group are capitalised
  within infrastructure assets. Other
  assets All other
  property, plant and equipment is stated at historical cost less accumulated
  depreciation. Historical
  cost includes expenditure that is directly attributable to the acquisition of
  the items. Subsequent costs are included in the assets carrying amount
  or recognised as a separate asset, as appropriate, only when it is probable
  that future economic benefits associated with the item will flow to the group
  and the cost of the item can be measured reliably. All other repairs and maintenance
  are charged to the income statement during the financial period in which they
  are incurred. Freehold
  land and assets in the course of construction are not depreciated. Other assets
  are depreciated by writing off their cost less their estimated residual value
  evenly over their estimated useful lives, based on managements judgement
  and experience, which are principally as follows: Buildings
  30-60 years 
  Operational assets 5-80 years Fixtures,
  fittings, tools and equipment 3-40 years Depreciation
  methods, residual values and useful lives are re-assessed annually and, if necessary,
  changes are accounted for prospectively.


The gain
  or loss arising on the disposal or retirement of an asset is determined as the
  difference between the sales proceeds and the carrying amount of the asset and
  is recognised in income. f)
    Impairment of tangible and intangible assets 
    excluding goodwillIntangible
    assets with definite useful lives and property, plant and equipment are reviewed
    for impairment at each reporting date to determine whether there is any indication
    that those assets may have suffered an impairment loss. If any such indication
    exists, the recoverable amount of the asset is estimated in order to determine
    the extent of the impairment loss, if any. Where the asset does not generate
    cashflows that are independent from other assets, the group estimates the
    recoverable amount of the cash-generating unit to which the asset belongs. The recoverable
  amount is the higher of fair value less costs to sell, and value in use. Value
  in use represents the net present value of expected future cashflows discounted
  on a pre-tax basis using a rate that reflects current market assessments of
  the time value of money and the risks specific to the asset for which the estimates
  of future cashflows have not been adjusted. If the
  recoverable amount of an asset (or cash-generating unit) is estimated to be
  less than its carrying amount, the carrying amount of the asset (or cash-generating
  unit) is reduced to its recoverable amount. Impairment of non-current assets
  is recognised in the income statement within operating costs. Where
  an impairment loss subsequently reverses, it is recognised in the income statement
  and the carrying amount of the asset is increased to the revised estimate of
  its recoverable amount, but not so as to exceed the carrying amount that would
  have been determined had no impairment loss been recognised in prior years. g)
    Financial instrumentsTo
    31 March 2005 
  Debt instruments New borrowings
  were stated at net proceeds received after deduction of issue costs. The issue
  costs of debt instruments were amortised at a constant rate over the life of
  the instrument. Interest
    rate swaps and financial futures Interest
    rate swap agreements and financial futures were used to manage interest rate
    exposure. Instruments designated as a hedge of a debt instrument were accounted
    for on an accruals basis, with amounts payable or receivable in respect of
    those instruments recognised as adjustments to interest expense of the designated
    liability. Realised
  gains and losses that occurred from the early termination of such instruments
  designated as a hedge were deferred and amortised to interest expense over the
  period of the hedged position, to the extent that the originally designated
  liability remained outstanding. In order
  to have qualified for hedge accounting, the notional amount of the groups
  interest rate swaps and financial futures must not have exceeded the amount
  of its existing variable rate debt and must have changed the interest rate characteristics
  of the underlying debt, while the contractual maturities cannot have exceeded
  the maturities of the debt.




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Currency
  swapsThe
  group entered into currency swaps to manage its exposure to fluctuations in
  currency rates. Principal amounts were revalued at exchange rates ruling at
  the date of the group balance sheet and included in the sterling value of debt.
  In order for such swaps to have qualified for hedge accounting, the forward
  contract/currency swap must have related to an existing asset, liability or
  firm commitment, have been in the same currency as the hedged item and have
  reduced the risk of foreign currency exchange movements to the groups
  operations. Where they did, exchange gains and losses were taken directly to
  reserves and included in the statement of total recognised gains and losses
  in accordance with SSAP 20 Foreign currency translation. From
  1 April 2005 (upon adoption of IAS 39 Financial Instruments: Recognition
  and Measurement)Financial
  assets and financial liabilities are recognised on the groups balance
  sheet when the group becomes a party to the contractual provisions of the instrument. Cash
  and short-term depositsIn the
  consolidated cashflow statement and related notes, cash and short-term deposits
  includes cash at bank and in hand, deposits, other short-term highly liquid
  investments which are readily convertible on initial investment into known amounts
  of cash within three months and which are subject to an insignificant risk of
  change in value. Financial
  investmentsInvestments
  (other than interests in joint ventures and fixed deposits) are recognised and
  derecognised on a trade date and are initially measured at fair value, including
  transaction costs. Investments are classified as either held-to-maturity, held-for-trading,
  loans and receivables or available-for-sale. Held-to-maturity investments and
  loans and receivables are measured at amortised cost. Held-for-trading and available-for-sale
  investments are measured at subsequent reporting dates at fair value. Where
  securities are held for trading purposes, gains and losses arising from changes
  in fair value are included in net profit or loss for the period. For available-for-sale
  investments, gains and losses arising from changes in fair value are recognised
  directly in equity, until the security is disposed of or is determined to be
  impaired, at which time the cumulative gain or loss previously recognised in
  equity is included in the net profit or loss for the period. Trade
  receivablesTrade receivables
  are stated at nominal value less allowances for estimated irrecoverable amounts. Trade
  payablesTrade payables
  are stated at their nominal value. Financial
  liabilities and equityFinancial
  liabilities and equity instruments are classified according to the substance
  of the contractual arrangements entered into. An equity instrument is any contract
  that evidences a residual interest in the assets of the group after deducting
  all of its liabilities. Equity
  instrumentsEquity
  instruments issued by the group are recorded at the proceeds received, net of
  direct issue costs. Bank
  borrowingsInterest-bearing
  bank loans and overdrafts are recorded at the proceeds received, net of direct
  issue costs. Finance charges,


including
  premiums payable on settlement or redemption and direct issue costs, are accounted
  for on an amortised cost basis to the income statement using the effective interest
  method and are added to the carrying amount of the instrument to the extent
  that they are not settled in the period in which they arise. Derivative
  financial instruments and hedge accountingInterest
  rate swap agreements and financial futures are used to manage interest rate
  exposure, while the group enters into currency swaps to manage its exposure
  to fluctuations in currency rates. The group does not use derivative financial
  instruments for speculative purposes. All financial
  derivatives are recognised in the balance sheet at fair value. Changes in the
  fair value of all derivative financial instruments are recognised in the income
  statement within finance expense as they arise, except for derivatives that
  are designated and effective in terms of cashflow hedging relationships, in
  which case the gains and losses are deferred in equity. Where
  hedge accounting has not been applied, the group may elect to designate a financial
  liability at inception as fair value through profit or loss provided the financial
  liability meets the conditions specified in IAS 39 Financial Instruments:
  Recognition and measurement. Where possible, hedge accounting is applied. Fair
  value hedgesFor
  an effective hedge of an exposure to changes in the fair value, the hedged item
  is adjusted for changes in fair value attributable to the risk being hedged
  with the corresponding entry in profit or loss. Gains or losses from remeasuring
  the derivative are recognised in profit or loss. Where
  changes in the fair value of a derivative differ to changes in the fair value
  of the hedged item attributable to the risks being hedged, the hedge ineffectiveness
  is recorded in the income statement within finance costs. Hedge
  accounting is discontinued prospectively when the hedging instrument is sold,
  terminated or exercised, where the hedge relationship no longer meets the criteria
  for hedge accounting in accordance with IFRS, or where the hedge designation
  is revoked. Any adjustment that has been recognised to the hedged item, for
  which the effective interest rate is used, is amortised to the income statement
  and is based on the recalculated effective interest rate at the time at which
  amortisation commences. Cashflow
    hedgesChanges
    in the fair value of derivative financial instruments that are designated
    and effective as hedges of future cashflows are recognised directly in equity
    and the ineffective portion is recognised immediately in the income statement.
    If the cashflow hedge for foreign currency risk of a firm commitment results
    in the recognition of a non-financial asset or a liability, then, at the time
    the non-financial asset or liability is recognised, the associated gains or
    losses on the derivative that had previously been recognised in equity are
    included in the initial recognition of the non-financial asset or liability.
    For hedges that do not result in the recognition of a non-financial asset
    or liability, amounts deferred in equity are recognised in the income statement
    in the same period in which the hedged item affects net profit or loss.




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Hedge
  ineffectiveness is recognised directly in the income statement within finance
  costs. Hedge
  accounting is discontinued when the hedge designation is revoked, or the hedging
  instrument expires or is sold, terminated, or exercised, or no longer qualifies
  for hedge accounting. At that time, any cumulative gain or loss on the hedging
  instrument recognised in equity is retained in equity until the forecast transaction
  occurs. If a hedged transaction is no longer expected to occur, the net cumulative
  gain or loss recognised in equity is transferred to net profit or loss for the
  period. Financial
  assets and liabilities designated at fair value through profit or lossThe
  group applies this designation where the complexity of the swaps means that
  they are disallowed from being allocated in a hedge relationship despite there
  being significant fair value offset between the hedged item and the derivative
  itself. The otherwise inconsistent accounting treatment that would have resulted
  allows the group to satisfy the criteria for this designation. The treatment
  of financial assets and liabilities designated at fair value through profit
  and loss is consistent with the groups documented risk management strategy. h)
  Foreign currency translationTransactions
  and balancesTransactions
  in foreign currencies are recorded at the exchange rates ruling on the dates
  of the transactions. At each balance sheet date, monetary assets and liabilities
  denominated in foreign currencies are translated into sterling at the relevant
  rates of exchange ruling on the balance sheet date. Gains and losses arising
  on retranslation are included in net profit or loss for the period, except for
  exchange differences arising on non-monetary assets and liabilities where the
  changes in fair value are recognised directly in equity. In order
  to hedge its exposure to certain foreign exchange risks, the group enters into
  forward contracts, options and other derivative instruments (see derivative
  financial instruments and hedge accounting in note g). Group
  companiesOn
  consolidation, the balance sheets of overseas subsidiaries and joint ventures
  (none of which has the currency of a hyper inflationary economy) are translated
  into sterling at exchange rates applicable at the balance sheet date. The income
  statements are translated into sterling using the average rate unless exchange
  rates fluctuate significantly in which case the exchange rate at the date the
  transaction occurred is used. Exchange differences resulting from the translation
  of such balance sheets at rates ruling at the beginning and end of the period,
  together with the differences between income statements translated at average
  rates and rates ruling at the period end, are dealt with as movements on the
  groups translation reserve, a separate component of equity. Such translation
  differences are recognised as income or as expenses in the period in which the
  operation is disposed of. Goodwill
  and fair value adjustments arising on the acquisition of a foreign entity are
  treated as assets and liabilities of the foreign entity and translated at the
  closing rate. The group has elected to treat goodwill and fair value adjustments
  arising on acquisitions before the date of implementation of IFRS 3 Business
  combinations (1 April 1999) as sterling denominated assets and liabilities.


i)
  Borrowing costs and finance incomeAll
  borrowing costs and finance income are recognised in the income statement in
  the period in which they are accrued. j)
  Construction contractsWhere
  the outcome of a construction contract can be estimated reliably, revenue and
  costs are recognised by reference to the stage of completion of the contract
  activity at the balance sheet date, as measured by the proportion that contract
  costs incurred for work performed to date bear to the estimated total contract
  costs, except where this would not be representative of the stage of completion.
  Variations in contract work, claims and incentive payments are included to the
  extent that they have been agreed with the customer. Where
  the outcome of a construction contract cannot be estimated reliably, contract
  revenue is recognised to the extent of contract costs incurred that it is probable
  will be recoverable. Contract costs are recognised as expenses in the period
  in which they are incurred. When
  it is probable that total contract costs will exceed total contract revenue,
  the expected loss is recognised as an expense immediately. k)
  Operating profitOperating
  profit is stated after charging operating expenses but before investment income
  and finance expense. l)
  Current asset investmentsCurrent
  asset investments are stated at the lower of cost and net realisable value. m)
  TaxationThe
  tax expense represents the sum of the tax currently payable and deferred tax. Current
  taxationCurrent
  tax, including UK corporation tax and foreign tax, is based on the taxable profit
  for the period and is provided at amounts expected to be paid (or recovered)
  using the tax rates and laws that have been enacted or substantially enacted
  at the balance sheet date. Taxable
  profit differs from the net profit as reported in the income statement because
  it excludes items of income or expense that are taxable or deductible in other
  years and it further excludes items that are never taxable or deductible. Deferred
  taxationDeferred
  tax is the tax expected to be payable or recoverable on differences between
  the carrying amounts of assets and liabilities in the financial statements and
  the corresponding tax bases used in the computation of taxable profit. Deferred
  tax liabilities are provided, using the liability method, on all taxable temporary
  differences at the balance sheet date. Such assets and liabilities are not recognised
  if the temporary difference arises from goodwill or from the initial recognition
  (other than in a business combination) of other assets and liabilities in a
  transaction that affects neither the taxable profit nor the accounting profit. Deferred
    tax liabilities are recognised for taxable temporary differences arising on
    investments in subsidiaries and interests in joint ventures, except where
    the group is able to control the reversal of the temporary difference and
    it is probable that the temporary difference will not reverse in the foreseeable
    future.




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        Utilities Annual Report & Accounts 2006 | 71
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Deferred
  tax is measured at the average tax rates that are expected to apply in the periods
  in which the temporary timing differences are expected to reverse based on tax
  rates and laws that have been enacted or substantially enacted at the balance
  sheet date. The carrying
  amount of deferred tax assets is reviewed at each balance sheet date and reduced
  to the extent that it is no longer more likely than not that sufficient taxable
  profits will be available to allow all or part of the asset to be recovered. Deferred
  tax is charged or credited in the income statement, except when it relates to
  items charged or credited to equity, in which case the deferred tax is also
  dealt with in equity. n)
  Employee benefitsPension
  obligationsThe group
  operates two defined benefit pension schemes, which are independent of the groups
  finances, for the substantial majority of its employees. Actuarial valuations
  of the schemes are carried out as determined by the pension scheme trustees
  using the projected unit credit method at intervals of not more than three years,
  the rates of contribution payable and the pension cost being determined on the
  advice of the actuaries, having regard to the results of these valuations. In
  any intervening years, the actuaries review the continuing appropriateness of
  the contribution rates. Defined
  benefit assets are measured at fair value while liabilities are measured at
  present value. The difference between the two amounts is recognised as a surplus
  or obligation in the balance sheet. The cost
  of providing pension benefits to employees relating to the current years
  service and the difference between the expected return on scheme assets and
  interest on scheme liabilities are included within the income statement within
  employee costs. All actuarial
  gains and losses as at 1 April 2004, the date of transition to IFRS, were recognised
  in full. All future actuarial gains and losses are recognised outside the income
  statement in retained earnings and presented in the statement of recognised
  income and expense. In addition,
  the group also operates defined contribution pension schemes. Payments are charged
  as employee costs as they fall due. The group has no further payment obligations
  once the contributions have been paid. Share-based
  compensation arrangementsThe group
  operates equity-settled, share-based compensation plans. In accordance with
  the transitional provisions, IFRS 2 Share-based Payments has been
  applied to all grants of equity instruments after 7 November 2002 that were
  unvested as of 1 April 2004. The group
  issues equity-settled share-based payments to certain employees. Equity-settled
  share-based payments are measured at fair value at the date of grant. The fair
  value determined at the grant date is expensed on a straight-line basis over
  the vesting period, based on estimates of the number of options that are expected
  to vest. Fair value is based on both simulation and binomial models, according
  to the relevant measures of performance. At each
  balance sheet date, the group revises its estimate of the number of options
  that are expected to become


exercisable
  with the impact of any revision being recognised in the income statement, and
  a corresponding adjustment to equity over the remaining vesting period. The
  proceeds received net of any directly attributable transaction costs are credited
  to share capital (nominal value) and share premium when the options are exercised. o)
  ProvisionsProvisions
  are recognised when the group has a present legal or constructive obligation
  as a result of past events, it is probable that an outflow of resources will
  be required to settle the obligation, and the amount can be reliably estimated. Environmental
  expenditure that relates to current or future revenues is expensed or capitalised
  as appropriate. Expenditure that relates to an existing condition caused by
  past operations that does not contribute to current or future earnings is expensed.
  Liabilities for environmental remediation costs are recognised when there is
  a legal or constructive obligation, environmental assessments or clean up are
  probable, and the associated costs can be reliably estimated. p)
  Revenue recognitionRevenue
  represents the fair value of the income receivable in the ordinary course of
  business for goods and services provided. Where relevant, this includes an estimate
  of the sales value of units supplied to customers between the date of the last
  meter reading and the period end, exclusive of value added tax and foreign sales
  tax. The group
  recognises revenue generally at the time of delivery and when collection of
  the resulting receivable is reasonably assured. Should the group consider that
  the criteria for revenue recognition are not met for a transaction, revenue
  recognition would be delayed until such time as the transaction becomes fully
  earned. Payments received in advance of revenue recognition are recorded as
  deferred revenue. The groups
  business process outsourcing division enters into long-term service contracts.
  In accordance with IAS 18 Revenue the group recognises revenues
  under these contracts using the percentage completion method and applying a
  cost-to-cost methodology. Further detail in relation to revenue recognition
  policies is provided on page 73. q)
  Grants and contributionsGrants
  and contributions receivable in respect of property, plant and equipment are
  treated as deferred income, which is credited to the income statement over the
  estimated economic lives of the related assets. r)
  LeasesLeases
  are classified according to the substance of the transaction. A lease that transfers
  substantially all the risks and rewards of ownership to the lessee is classified
  as a finance lease. All other leases are classified as operating leases. Finance
  leasesFinance
  leases are capitalised in the consolidated balance sheet at their fair value
  or, if lower, at the present value of the minimum lease payments, each determined
  at the inception of the lease. The corresponding liability is shown as a finance
  lease obligation to the lessor. Leasing repayments comprise both a capital and
  a finance element. Where the lease is of a fixed interest nature, the finance
  element is written off to the income statement so as




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to produce
  an approximately constant periodic rate of charge on the outstanding obligation.
  Where the lease is of a floating interest rate nature, the finance element written
  off to the income statement reflects the floating interest rate charge incurred
  during the period on the outstanding obligation. Such assets are depreciated
  over the shorter of their estimated useful lives and the period of the lease. Operating
  leasesOperating
  lease rentals are charged to the income statement on a straight-line basis over
  the period of the lease. s)
  Critical accounting policies and key sources of estimation uncertaintyIn
  the process of applying the groups accounting policies, the group is required
  to make certain estimates, judgements and assumptions that it believes are reasonable
  based upon the information available. These estimates and assumptions affect
  the reported amounts of assets and liabilities at the date of the financial
  statements and the reported amounts of revenue and expenses during the periods
  presented. On an
  ongoing basis, the group evaluates its estimates using historical experience,
  consultation with experts and other methods considered reasonable in the particular
  circumstances. Actual results may differ significantly from the estimates, the
  effect of which is recognised in the period in which the facts that give rise
  to the revision become known. The following
  paragraphs detail the policies the group believes to have the most significant
  impact on the annual results under IFRS. Carrying
    value of long-lived assetsThe
  carrying value of property, plant and equipment (PPE) as at 31 March 2006 was
  £8,543.9 million. Additions to PPE totalled £539.4 million and the
  depreciation charge was £278.2 million in the year ended 31 March 2006.
  The estimated useful economic lives of PPE are based on managements judgement
  and experience. When management identifies that actual useful lives differ materially
  from the estimates used to calculate depreciation, that charge is adjusted prospectively.
  Due to the significance of PPE investment to the group, variations between actual
  and estimated useful lives could impact operating results both positively and
  negatively, although historically, few changes to estimated useful lives have
  been required. The group
  is required to evaluate the carrying values of PPE for impairment whenever circumstances
  indicate, in managements judgement, that the carrying value of such assets
  may not be recoverable. An impairment review requires management to make subjective
  judgements concerning the cashflows, growth rates and discount rates of the
  cash-generating units under review. Revenue
  recognitionThe
  group recognises revenue generally at the time of delivery and when collection
  of the resulting receivable is reasonably assured. Should management consider
  that the criteria for revenue recognition are not met for a transaction, revenue
  recognition would be delayed until such time as the transaction becomes fully
  earned. Payments received in advance of revenue recognition are recorded as
  deferred revenue. For licensed
  multi-utility operations, the group raises bills and recognises revenue in accordance
  with its entitlement to receive


revenue
  in line with the limits established by the periodic regulatory price review
  processes. For water and wastewater customers with water meters, the receivable
  billed is dependent upon the volume supplied including an estimate of the sales
  value of units supplied between the date of the last meter reading and the year
  end. Meters are read on a cyclical basis and the group recognises revenue for
  unbilled amounts based on estimated usage from the last billing through to the
  end of the financial year. The estimated usage is based on historic data, judgement
  and assumptions; actual results could differ from these estimates, which would
  result in operating revenues being adjusted in the period that the revision
  to the estimates is determined. For customers who do not have a meter, the receivable
  billed is dependent upon the rateable value of the property, as assessed by
  an independent rating officer. The customers
  of the electricity distribution business are the electricity supply companies
  that utilise United Utilities Electricitys distribution network to distribute
  electricity from generators to the end consumer. The receivable billed is dependent
  upon the volume of electricity distributed, including estimates of the units
  distributed to customers. The estimated usage is based on historic data, judgement
  and assumptions. Operating revenues are gradually adjusted to reflect actual
  usage in the period over which the meters are read. For the
  groups other businesses (infrastructure management and business process
  outsourcing), revenue is recognised in line with activity and performance, normally
  using amounts specified in contractual obligations and when collectability is
  reasonably assured. In general: 
    variable
      revenues, for example, revenues dependent upon customer volumes in the period,
      are recognised only when those variable activities are performed;
    performance
      incentives are recognised in revenue only to the extent that incentives
      are reasonably considered to have been earned;
    revenue
      received in advance of performance is recognised as deferred income. When
      performance occurs, the deferred income is released and simultaneously reported
      as revenue; and
    set-up
      fees received from clients as contributions to costs are credited to deferred
      income when received and recognised in revenue (i) as costs are incurred
      for fees identified as being against transition costs; or (ii) over the
      expected life of fixed assets if the fees are received as a contribution
      to assets; or (iii) over the period of the contract in line with activity
      or performance levels for fees not identified against delivered services. A breakdown
  of revenues by activity is contained in note 1 to the consolidated financial
  statements. Provision
  for doubtful receivablesAt
  each balance sheet date, the company and each of its subsidiaries evaluate the
  collectability of trade receivables and record provisions for doubtful receivables
  based on experience. These provisions are based on, amongst other things, comparisons
  of the relative age of accounts and consideration of actual write-off history.
  The actual level of receivables collected may differ from the estimated levels
  of recovery, which could impact operating results positively or negatively.
  As at 31 March 2006, the groups gross trade receivables were £387.0
  million and the provision for doubtful receivables was £155.6 million.




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Accounting
  for provisions and contingenciesThe
  group is subject to a number of claims incidental to the normal conduct of its
  business, relating to and including commercial, contractual and employment matters,
  which are handled and defended in the ordinary course of business. The group
  routinely assesses the likelihood of any adverse judgements or outcomes to these
  matters as well as ranges of probable and reasonably estimated losses. Reasonable
  estimates involve judgements made by management after considering information
  including notifications, settlements, estimates performed by independent parties
  and legal counsel, available facts, identification of other potentially responsible
  parties and their ability to contribute, and prior experience. A provision is
  recognised when it is probable that an obligation exists for which a reliable
  estimate can be made of the obligation after careful analysis of the individual
  matter. The required provision may change in the future due to new developments
  and as additional information becomes available. Matters that either are possible
  obligations or do not meet the recognition criteria for a provision are disclosed,
  unless the possibility of transferring economic benefits is remote. Goodwill
  The group
  records all assets and liabilities acquired in purchase acquisitions, including
  goodwill, at fair value. Goodwill is not amortised but is subject, at a minimum,
  to annual tests for impairment. The initial goodwill recorded and subsequent
  impairment analyses require management to make subjective judgements concerning
  the fair value of cash-generating units. Estimates of fair value are consistent
  with market information and the groups plans and forecasts. As at 31 March
  2006, the net carrying value of goodwill was £153.1 million. Retirement
  benefitsThe
  group operates two defined benefit schemes, one of which has a defined contribution
  section, which are independent of the groups finances. Actuarial valuations
  of the schemes are carried out as determined by the trustees at intervals of
  not more than three years. The pension cost under IAS 19 is assessed in accordance
  with the advice of a firm of actuaries based on the latest actuarial valuation
  and assumptions determined by the actuary. The assumptions are based on information
  supplied to the actuary by the company, supplemented by discussions between
  the actuary and management. The assumptions are disclosed in note 19. Operating
  results are affected by the actuarial assumptions used. These assumptions include
  investment returns on the schemes assets, discount rates, pay growth and
  increases to pensions in payment and deferred pensions and may differ from actual
  results due to changing market and economic conditions and longer or shorter
  lives of participants. Derivatives
  and borrowingsThe
  groups default treatment is for borrowings to be carried at amortised
  cost, whilst derivatives are recognised separately on the balance sheet at fair
  value with movements in those fair values reflected through the income statement.
  This has the potential to introduce considerable volatility to both the income
  statement and balance sheet. Therefore, for fair value hedges, changes in the
  recognised value of hedged debt that are attributable to the hedged risk are
  adjusted through the income statement. In the case of cashflow hedges, movements
  in the fair value of derivatives are deferred within reserves until they can
  be recycled through the income statement to offset the future income statement
  effect of changes in the hedged risk. In order to apply this treatment,


it must be demonstrated that the derivative has been, and will continue to be, an effective hedge of the hedged risk within the debt item. Changes in the fair value of all
derivatives are recognised in the income statement, except for derivatives that are designated and effective in terms of cashflow hedging relationships, in which case the gains and losses are deferred in equity. The group applies the fair value
through profit or loss option where the complexity of the swaps means that they are disallowed from being allocated in a hedge relationship despite there being significant fair value offset between the hedged item and the derivative itself. This
area is considered to be of significance due to the magnitude of the groups level of borrowings. Recently
  issued accounting pronouncementsInternational
  Financial Reporting StandardsAt
  the date of authorisation of these financial statements, the following relevant
  standards and interpretations were in issue but not yet effective. The directors
  anticipate that the adoption of these standards and interpretations will have
  no material impact on the groups financial statements. The directors anticipate
  that the group will adopt these standards and interpretations on their effective
  dates. IAS 1 Amendment  Capital disclosures, is effective for periods commencing on or after 1 January 2007 IAS 39 Amendment  Cashflow hedge accounting of forecast intra group transactions, issued in April 2005, is effective for periods commencing on or after 1 January 2006 IAS 39
  Amendment  The fair value option, issued in June 2005, is effective for
  periods commencing on or after 1January
  2006 IAS 39
  Amendment  Financial guarantee contracts, issued in August 2005 is effective
  for periods commencing on or after 1January
  2006 IFRS
  7 Financial instruments: Disclosures, issued in August 2005, is effective for
  periods commencing on or after 1January
  2007 IFRIC 4 Determining whether an arrangement contains a lease, issued in December 2004, is effective for periods commencing on or after 1 January 2006 IFRIC 8 Scope of IFRS 2, issued in January 2006, is effective for periods commencing on or after 1 May 2006 IFRIC 9 Reassessment of embedded derivatives, issued in March 2006, is effective for periods commencing on or after 1 June 2006 Interpretations in issue but not considered relevant to the activities of the group are as follows: IFRIC 1 Changes in existing decommissioning, restoration and similar liabilities IFRIC 2 Members shares in cooperative entities and similar instruments IFRIC 5 Rights to interests arising from decommissioning, restoration and environmental rehabilitation funds IFRIC 6 Liabilities arising from participating in a specific market  waste electrical and electronic equipment IFRIC
    7 Applying the re-statement approach under IAS 29 Financial Reporting Hyperinflationary
    Economies.




|74 | United
    Utilities Annual Report & Accounts 2006
|-- | --------------------------------------------------

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| |  |                     
| |  | --------------------
| |  | Financial statements
| |  |                     
| |  |                     

|                                                     |  |  | 
|---------------------------------------------------- |  |  | 
|Notes
      to the consolidated financial statements |  |  | 
|                                                     |  |  | 

1 Segment
  reportingThe
  groups revenue predominantly arises from the sale of services.

For management
  purposes, the group is organised into three major operating divisions (2005:
  four). These divisions form the basis on which the following primary segment
  information is reported.

The group
  was also previously involved in telecommunications. That operation was discontinued
  with effect from 26 February 2006 (see note 7).

Trading
  between segments is carried out on an arms length basis and transactions
  are priced accordingly. External market prices are used where available; where
  not available, margins generated are compared to those generated from external
  sales and adjusted where necessary.

|                                                                                                                                                         | Licensed      |   |                |   | Business    |   |             |  |              |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------- | - | -------------- | - | ----------- | - | ----------- |  | ------------ | - | ------- | -
|                                                                                                                                                         | multi-utility |   | Infrastructure |   | process     |   |             |  |              |   |         |  
|                                                                                                                                                         | operations    |   | management     |   | outsourcing |   | Unallocated |  | Eliminations |   | Group   |  
|Year
      ended 31 March 2006                                                                                                                           | £m            |   | £m             |   | £m          |   | £m          |  | £m           |   | £m      |  
|                                                                                                                                                         |               |   |                |   |             |   |             |  |              |   |         |  
|Continuing
      operations                                                                                                                              |               |   |                |   |             |   |             |  |              |   |         |  
|                                                                                                                                                         |               |   |                |   |             |   |             |  |              |   |         |  
|Revenue                                                                                                                                                  | 1,502.9       |   | 692.3          |   | 404.7       |   |            |  | (213.1       | ) | 2,386.8 |  
|                                                                                                                                                         |               |   |                |   |             |   |             |  |              |   |         |  
|Segmental
      operating profit from continuing operationsbefore pension settlements, amortisation of certainintangible assets* and restructuring costs | 652.3         |   | 95.5           |   | 10.2        |   | 6.7         |  |             |   | 764.7   |  
|Pension
      settlements                                                                                                                                |              |   |               |   | 10.6        |   |            |  |             |   | 10.6    |  
|                                                                                                                                                         |               |   |                |   |             |   |             |  |              |   |         |  
|Segmental
      operating profit from continuing operationsbefore
      amortisation of certain intangible assets* andrestructuring
      costs          | 652.3         |   | 95.5           |   | 20.8        |   | 6.7         |  |             |   | 775.3   |  
|Amortisation
      of certain intangible assets*                                                                                                         |              |   | (1.1           | ) | (8.7        | ) |            |  |             |   | (9.8    | )
|Restructuring
      costs                                                                                                                                | (0.1          | ) | (4.7           | ) | (20.7       | ) |            |  |             |   | (25.5   | )
|                                                                                                                                                         |               |   |                |   |             |   |             |  |              |   |         |  
|Segmental
      operating profit/(loss)                                                                                                                  | 652.2         |   | 89.7           |   | (8.6        | ) | 6.7         |  |             |   | 740.0   |  
|                                                                                                                                                         |               |   |                |   |             |   |             |  |              |   |         |  
|Investment
      income                                                                                                                                  |               |   |                |   |             |   |             |  |              |   | 54.0    |  
|Fair
      value loss on debt and derivative instruments                                                                                                 |               |   |                |   |             |   |             |  |              |   | (15.7   | )
|Other
      finance expense                                                                                                                              |               |   |                |   |             |   |             |  |              |   | (339.0  | )
|                                                                                                                                                         |               |   |                |   |             |   |             |  |              |   |         |  
|Profit
      before taxation                                                                                                                             |               |   |                |   |             |   |             |  |              |   | 439.3   |  
|Taxation                                                                                                                                                 |               |   |                |   |             |   |             |  |              |   | (120.3  | )
|                                                                                                                                                         |               |   |                |   |             |   |             |  |              |   |         |  
|Profit
      for the year from continuing operations                                                                                                     |               |   |                |   |             |   |             |  |              |   | 319.0   |  
|                                                                                                                                                         |               |   |                |   |             |   |             |  |              |   |         |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Pension
      settlements arise in the normal course of business at the commencement of
      and exit from long-term contracts in the business process outsourcing and
      infrastructure management segments of the group.                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|*                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Restructuring
      costs principally relate to severance and programme costs in the business
      process outsourcing segment and are disclosed separately as the directors
      consider that they are material and this provides for a more representative
      view of underlying segmental business performance. The amount of restructuring
      costs relating to employee benefits expense, including pension costs, is
      disclosed in note 2.
|Restructuring
      costs are summarised in the table below:                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|                          | Licensed      |  |                |  | Business    |  |             |  |       | 
|------------------------- | ------------- |  | -------------- |  | ----------- |  | ----------- |  | ----- | 
|Restructuring
      costs | multi-utility |  | Infrastructure |  | process     |  |             |  |       | 
|                          | operations    |  | management     |  | outsourcing |  | Unallocated |  | Group | 
|2006                      | £m            |  | £m             |  | £m          |  | £m          |  | £m    | 
|                          |               |  |                |  |             |  |             |  |       | 
|Wages
      and salaries  | 0.1           |  | 1.7            |  | 9.2         |  |            |  | 11.0  | 
|Pension
      costs       |              |  | 1.1            |  | 2.5         |  |            |  | 3.6   | 
|Other                     |              |  | 1.9            |  | 9.0         |  |            |  | 10.9  | 
|                          |               |  |                |  |             |  |             |  |       | 
|                          | 0.1           |  | 4.7            |  | 20.7        |  |            |  | 25.5  | 
|                          |               |  |                |  |             |  |             |  |       | 

|                         |               |  |                |  |             |  |             |  |       | 
|------------------------ | ------------- |  | -------------- |  | ----------- |  | ----------- |  | ----- | 
|                         | Licensed      |  |                |  | Business    |  |             |  |       | 
|                         | multi-utility |  | Infrastructure |  | process     |  |             |  |       | 
|                         | operations    |  | management     |  | outsourcing |  | Unallocated |  | Group | 
|2005                     | £m            |  | £m             |  | £m          |  | £m          |  | £m    | 
|                         |               |  |                |  |             |  |             |  |       | 
|Wages
      and salaries | 8.5           |  | 0.6            |  | 2.9         |  | 0.2         |  | 12.2  | 
|Pension
      costs      | 13.8          |  |               |  | 0.9         |  | 0.2         |  | 14.9  | 
|Other                    | 0.6           |  | 0.9            |  | 1.1         |  |            |  | 2.6   | 
|                         |               |  |                |  |             |  |             |  |       | 
|                         | 22.9          |  | 1.5            |  | 4.9         |  | 0.4         |  | 29.7  | 
|                         |               |  |                |  |             |  |             |  |       | 



|United
          Utilities Annual Report & Accounts 2006 | 75
|-------------------------------------------------------- | --

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| |                            | 
| | -------------------------- | 
| | Financial
      statements | 
| |                            | 
| |                            | 

|                                                               |  | 
|-------------------------------------------------------------- |  | 
|Notes
      to the consolidated financial statements continued |  | 
|                                                               |  | 



1 Segment
  reportingcontinued

|                                                             | **Period
      ended** |  
|------------------------------------------------------------ | ---------------------- | -
|                                                             | 26
      February 2006 |  
|                                                             | Telecommunications     |  
|***Discontinued
      operation (note 7)***                  | £m                     |  
|                                                             |                        |  
|Revenue                                                      |                        |  
|External
      sales                                         | 163.6                  |  
|Intra-group
      sales                                      | 11.8                   |  
|                                                             |                        |  
|Total
      revenue                                          | 175.4                  |  
|Operating
      expenses                                     | (193.0                 | )
|                                                             |                        |  
|Loss
      before taxation                                   | (17.6                  | )
|Taxation
      on loss                                       | 8.6                    |  
|                                                             |                        |  
|Loss
      for the period from discontinued operation        | (9.0                   | )
|                                                             |                        |  
|Adjustment
      to value before taxation                    | (147.7                 | )
|Taxation
      on adjustment to value                        | 31.6                   |  
|                                                             |                        |  
|Net
      adjustment to value                                | (116.1                 | )
|                                                             |                        |  
|Loss
      on disposal of discontinued operation             | (9.1                   | )
|Taxation
      on loss on disposal of discontinued operation | 23.4                   |  
|                                                             |                        |  
|Net
      profit on disposal after taxation                  | 14.3                   |  
|                                                             |                        |  
|Total
      loss for the period from discontinued operation  | (110.8                 | )
|                                                             |                        |  

At 30 September
2005, on recognition of the assets and liabilities of the Your Communications
business as a disposal group in accordance with IFRS 5 Non-current Assets
held
for Sale and Discontinued Operations, an adjustment to fair value was recognised.
The adjustment to carrying value of £147.7 million was allocated against
property, plant and equipment £105.4 million (see note 10), goodwill
£24.4 million (see note 11) and other intangible assets £17.9 million
(see note 12). Your Communications has subsequently been sold, post impairment,
giving rise to a pre-tax loss on disposal of £9.1 million. The post-tax
profit on  disposal represents the fair value of the consideration received less
the carrying amount of the subsidiarys net assets and attributable goodwill,
net of the associated tax credit and transaction costs.

|                                    | Licensed      |   |                |   | Business    |   |             |   |              |  |          |  
|----------------------------------- | ------------- | - | -------------- | - | ----------- | - | ----------- | - | ------------ |  | -------- | -
|                                    | multi-utility |   | Infrastructure |   | process     |   |             |   |              |  |          |  
|                                    | operations    |   | management     |   | outsourcing |   | Unallocated |   | Eliminations |  | Group    |  
|**Year
      ended 31 March 2006**  | £m            |   | £m             |   | £m          |   | £m          |   | £m           |  | £m       |  
|                                    |               |   |                |   |             |   |             |   |              |  |          |  
|*Continuing
      operations*       |               |   |                |   |             |   |             |   |              |  |          |  
|*Other
      information*           |               |   |                |   |             |   |             |   |              |  |          |  
|Capital
      additions             | 511.9         |   | 49.2           |   | 205.0       |   | 5.7         |   |             |  | 771.8    |  
|Depreciation
      and amortisation | 265.3         |   | 17.5           |   | 37.5        |   |            |   |             |  | 320.3    |  
|                                    |               |   |                |   |             |   |             |   |              |  |          |  
|*Balance
      sheet*               |               |   |                |   |             |   |             |   |              |  |          |  
|ASSETS                              |               |   |                |   |             |   |             |   |              |  |          |  
|Segment
      assets                | 9,426.6       |   | 701.9          |   | 321.1       |   | 846.8       |   |             |  | 11,296.4 |  
|                                    |               |   |                |   |             |   |             |   |              |  |          |  
|LIABILITIES                         |               |   |                |   |             |   |             |   |              |  |          |  
|Segment
      liabilities           | (6,406.5      | ) | (495.3         | ) | (175.3      | ) | (1,588.4    | ) |             |  | (8,665.5 | )
|                                    |               |   |                |   |             |   |             |   |              |  |          |  



|76 | United Utilities Annual Report & Accounts 2006
|-- | ----------------------------------------------

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| |  |                           
| |  | --------------------------
| |  | Financial
      statements
| |  |                           
| |  |                           

| |  |  | 
| |  |  | 
| |  |  | 
| |  |  | 



1 Segment
  reportingcontinued

|                                                                                                                                                                 | Licensed      |   |                |   | Business    |   |             |   |              |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------- | - | -------------- | - | ----------- | - | ----------- | - | ------------ | - | ------- | -
|                                                                                                                                                                 | multi-utility |   | Infrastructure |   | process     |   |             |   |              |   |         |  
|                                                                                                                                                                 | operations    |   | management     |   | outsourcing |   | Unallocated |   | Eliminations |   | Group   |  
|**Year
      ended 31 March 2005**                                                                                                                               | £m            |   | £m             |   | £m          |   | £m          |   | £m           |   | £m      |  
|                                                                                                                                                                 |               |   |                |   |             |   |             |   |              |   |         |  
|*Continuing
      operations*                                                                                                                                    |               |   |                |   |             |   |             |   |              |   |         |  
|Revenue                                                                                                                                                          | 1,384.7       |   | 512.2          |   | 396.4       |   |            |   | (189.6       | ) | 2,103.7 |  
|                                                                                                                                                                 |               |   |                |   |             |   |             |   |              |   |         |  
|Segmental
      operating profit from continuing operations before pension settlements,
      amortisation of certain intangible assets* and restructuring costs | 564.6         |   | 82.2           |   | 24.3        |   | 4.8         |   |             |   | 675.9   |  
|Pension
      settlements                                                                                                                                        |              |   | 7.8            |   |            |   |            |   |             |   | 7.8     |  
|                                                                                                                                                                 |               |   |                |   |             |   |             |   |              |   |         |  
|Segmental
      operating profit from continuing operations before amortisation of certain
      intangible assets* and restructuring costs                      | 564.6         |   | 90.0           |   | 24.3        |   | 4.8         |   |             |   | 683.7   |  
|Amortisation
      of certain intangible assets*                                                                                                                 |              |   | 0.6            |   | (3.2        | ) |            |   |             |   | (2.6    | )
|Restructuring
      costs                                                                                                                                        | (22.9         | ) | (1.5           | ) | (4.9        | ) | (0.4        | ) |             |   | (29.7   | )
|                                                                                                                                                                 |               |   |                |   |             |   |             |   |              |   |         |  
|Segmental
      operating profit                                                                                                                                 | 541.7         |   | 89.1           |   | 16.2        |   | 4.4         |   |             |   | 651.4   |  
|Investment
      income                                                                                                                                          |               |   |                |   |             |   |             |   |              |   | 38.3    |  
|Other
      finance expense                                                                                                                                      |               |   |                |   |             |   |             |   |              |   | (322.1  | )
|                                                                                                                                                                 |               |   |                |   |             |   |             |   |              |   |         |  
|Profit
      before taxation                                                                                                                                     |               |   |                |   |             |   |             |   |              |   | 367.6   |  
|Taxation                                                                                                                                                         |               |   |                |   |             |   |             |   |              |   | (96.1   | )
|                                                                                                                                                                 |               |   |                |   |             |   |             |   |              |   |         |  
|Profit
      for the year from continuing operations                                                                                                             |               |   |                |   |             |   |             |   |              |   | 271.5   |  
|                                                                                                                                                                 |               |   |                |   |             |   |             |   |              |   |         |  
|                                                                                                                                                                 |               |   |                |   |             |   |             |   |              |   |         |  

|                                                    | Year
      ended    |  
|--------------------------------------------------- | ------------------- | -
|                                                    | 31
      March 2005 |  
|                                                    | Telecommunications  |  
|*Discontinued
      operation (note 7)*             | £m                  |  
|                                                    |                     |  
|Revenue                                             |                     |  
|External
      sales                                | 219.4               |  
|Intra-group
      sales                             | 14.3                |  
|                                                    |                     |  
|Total
      revenue                                 | 233.7               |  
|Operating
      expenses                            | (245.2              | )
|                                                    |                     |  
|Loss
      before taxation                          | (11.5               | )
|Taxation
      on loss                              | 2.1                 |  
|                                                    |                     |  
|Loss
      for the year from discontinued operation | (9.4                | )
|                                                    |                     |  
|                                                    |                     |  

|                                    | Licensed      |   |                |   | Business    |   |             |   |              |  |          |  
|----------------------------------- | ------------- | - | -------------- | - | ----------- | - | ----------- | - | ------------ |  | -------- | -
|                                    | multi-utility |   | Infrastructure |   | process     |   |             |   |              |  |          |  
|                                    | operations    |   | management     |   | outsourcing |   | Unallocated |   | Eliminations |  | Group    |  
|Year
      ended 31 March 2005      | £m            |   | £m             |   | £m          |   | £m          |   | £m           |  | £m       |  
|                                    |               |   |                |   |             |   |             |   |              |  |          |  
|*Continuing
      operations*       |               |   |                |   |             |   |             |   |              |  |          |  
|*Other
      information*           |               |   |                |   |             |   |             |   |              |  |          |  
|Capital
      additions             | 803.9         |   | 46.6           |   | 42.0        |   | 10.1        |   |             |  | 902.6    |  
|Depreciation
      and amortisation | 282.3         |   | 20.5           |   | 29.0        |   | (1.1        | ) |             |  | 330.7    |  
|                                    |               |   |                |   |             |   |             |   |              |  |          |  
|*Balance
      sheet*               |               |   |                |   |             |   |             |   |              |  |          |  
|ASSETS                              |               |   |                |   |             |   |             |   |              |  |          |  
|Segment
      assets                | 8,885.2       |   | 465.4          |   | 204.2       |   | 594.5       |   |             |  | 10,149.3 |  
|                                    |               |   |                |   |             |   |             |   |              |  |          |  
|LIABILITIES                         |               |   |                |   |             |   |             |   |              |  |          |  
|Segment
      liabilities           | (6,223.8      | ) | (393.3         | ) | (158.7      | ) | (1,229.1    | ) |             |  | (8,004.9 | )
|                                    |               |   |                |   |             |   |             |   |              |  |          |  
|

Revenue from the groups discontinued operation was derived principally from the United Kingdom.

Of the
  groups consolidated revenue and assets for continuing operations, greater
  than 90 per cent is derived from customers located in the United Kingdom, for
  both of the years ended 31 March 2006 and 31 March 2005, and hence no geographical
  analysis is presented.



|United
          Utilities Annual Report & Accounts 2006 | 77
|-------------------------------------------------------- | --

---



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| |                            | 
| | -------------------------- | 
| | Financial
      statements | 
| |                            | 
| |                            | 

|                                                               |  | 
|-------------------------------------------------------------- |  | 
|Notes
      to the consolidated financial statements continued |  | 
|                                                               |  | 



2Directors
  and employees

Directors remuneration

|                                      | **2006** |  | 2005 | 
|------------------------------------- | -------- |  | ---- | 
|                                      | **£m**   |  | £m   | 
|                                      |          |  |      | 
|Fees
      to non-executive directors | 0.6      |  | 0.5  | 
|Salaries                              | 1.8      |  | 1.4  | 
|Benefits                              | 0.1      |  | 0.2  | 
|Bonus                                 | 0.8      |  | 0.8  | 
|Share-based
      payments            | 1.0      |  | 0.5  | 
|                                      |          |  |      | 
|                                      | 4.3      |  | 3.4  | 
|                                      |          |  |      | 

Remuneration of key management personnel

|                                                | 2006 |  | 2005 | 
|----------------------------------------------- | ---- |  | ---- | 
|                                                | £m   |  | £m   | 
|                                                |      |  |      | 
|Salaries
      and short-term employee benefits | 4.9  |  | 5.1  | 
|Post
      employment benefits                  | 2.9  |  | 1.8  | 
|Share-based
      payments                      | 2.3  |  | 1.2  | 
|                                                |      |  |      | 
|                                                | 10.1 |  | 8.1  | 
|                                                |      |  |      | 

Key management personnel comprises all executive directors and certain senior managers who are members of the executive leadership team.

Employee costs

|                                                                      |       |   | Group |   |      |  | Company | 
|--------------------------------------------------------------------- | ----- | - | ----- | - | ---- |  | ------- | 
|                                                                      |       |   |       |   |      |  |         | 
|                                                                      | 2006  |   | 2005  |   | 2006 |  | 2005    | 
|                                                                      | £m    |   | £m    |   | £m   |  | £m      | 
|                                                                      |       |   |       |   |      |  |         | 
|Wages
      and salaries                                              | 442.2 |   | 397.7 |   | 10.0 |  | 14.4    | 
|Social
      security costs                                           | 37.8  |   | 31.8  |   | 1.1  |  | 1.2     | 
|Pension
      costs                                                   | 37.0  |   | 47.6  |   | 4.1  |  | 3.5     | 
|                                                                      |       |   |       |   |      |  |         | 
|                                                                      | 517.0 |   | 477.1 |   | 15.2 |  | 19.1    | 
|Capital
      schemes and charges against provisions                  | (88.0 | ) | (84.3 | ) |     |  |        | 
|                                                                      |       |   |       |   |      |  |         | 
|Amounts
      attributable to continuing operations                   | 429.0 |   | 392.8 |   | 15.2 |  | 19.1    | 
|Employee
      benefit expense attributable to discontinued operation | 24.7  |   | 31.1  |   |     |  |        | 
|                                                                      |       |   |       |   |      |  |         | 
|                                                                      | 453.7 |   | 423.9 |   | 15.2 |  | 19.1    | 
|Less:
      employee benefit expense attributable to joint ventures   | (4.3  | ) | (5.2  | ) |     |  |        | 
|                                                                      |       |   |       |   |      |  |         | 
|                                                                      | 449.4 |   | 418.7 |   | 15.2 |  | 19.1    | 
|                                                                      |       |   |       |   |      |  |         | 

In addition
     to the above, restructuring costs disclosed on the face of the income statement

  and in note 1 include wages and salaries expense of £11.0 million (2005:
  £12.2 million) and pension costs (see note 19) of £3.6 million
  (2005: £14.9
   million).

Average
number of employees during the year (full-time equivalents)

|                                                  | 2006   |  | 2005   | 
|------------------------------------------------- | ------ |  | ------ | 
|                                                  | number |  | number | 
|                                                  |        |  |        | 
|Licensed
      multi-utility operations           | 4,775  |  | 4,889  | 
|Infrastructure
      management                   | 3,269  |  | 2,510  | 
|Business
      process outsourcing                | 8,203  |  | 7,693  | 
|Telecommunications
      (discontinued operation) | 653    |  | 682    | 
|Other
      activities                            | 129    |  | 161    | 
|                                                  |        |  |        | 
|                                                  | 17,029 |  | 15,935 | 
|                                                  |        |  |        | 



|78 | United Utilities Annual Report & Accounts 2006
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| |  |                           
| |  | --------------------------
| |  | Financial
      statements
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| |  |                           
| |  |                           
| |  |                           



3 Operating
  profit

The following
  items have been included in arriving at the groups operating profit and
  the loss from the discontinued operation:

|                                                            | Continuing
      operations |   | Discontinued
      operation |   | Total |  | Total | 
|----------------------------------------------------------- | --------------------------- | - | ---------------------------- | - | ----- |  | ----- | 
|                                                            |                             |   |                              |   |       |  |       | 
|                                                            | 2006                        |   | 2005                         |   | 2006  |  | 2005  | 
|                                                            | £m                          |   | £m                           |   | £m    |  | £m    | 
|                                                            |                             |   |                              |   |       |  |       | 
|Employee
      benefits expense                             |                             |   |                              |   |       |  |       | 
|Employee
      costs (see note 2)                           | 429.0                       |   | 392.8                        |   | 24.7  |  | 31.1  | 
|                                                            |                             |   |                              |   |       |  |       | 
|Depreciation
      and amortisation expense                 |                             |   |                              |   |       |  |       | 
|Depreciation
      of property, plant and equipment:        |                             |   |                              |   |       |  |       | 
|Owned
      assets (see note 10)                            | 263.3                       |   | 266.6                        |   | 13.2  |  | 20.9  | 
|Under
      finance leases (see note 10)                    | 1.7                         |   | 1.7                          |   |      |  |      | 
|Amortisation
      of other intangible assets (see note 12) | 55.3                        |   | 62.4                         |   | 4.9   |  | 6.8   | 
|                                                            |                             |   |                              |   |       |  |       | 
|Other
      income                                          |                             |   |                              |   |       |  |       | 
|Profit
      on disposal of property, plant and equipment   | (4.8                        | ) | (4.4                         | ) |      |  |      | 
|                                                            |                             |   |                              |   |       |  |       | 
|Other
      operating costs                                 |                             |   |                              |   |       |  |       | 
|Other
      operating leases payable:                       |                             |   |                              |   |       |  |       | 
|Property                                                    | 11.4                        |   | 9.3                          |   |      |  | 3.8   | 
|Plant
      and equipment                                   | 3.2                         |   | 4.9                          |   |      |  | 0.7   | 
|Amortisation
      of government grants                     | (11.4                       | ) | (10.5                        | ) |      |  |      | 
|Restructuring
      costs                                   | 25.5                        |   | 29.7                         |   |      |  |      | 
|Research
      and development expenses                     | 1.9                         |   | 0.8                          |   |      |  |      | 
|                                                            |                             |   |                              |   |       |  |       | 

During
  the year, the group obtained the following services from the groups auditors,
  at costs detailed below:

|                                         | 2006 |  | 2005 | 
|---------------------------------------- | ---- |  | ---- | 
|Year
      ended 31 March                | £m   |  | £m   | 
|                                         |      |  |      | 
|Audit
      services                     |      |  |      | 
|Statutory
      audit                    | 0.9  |  | 0.6  | 
|Audit
      related regulatory reporting | 0.7  |  | 0.7  | 
|                                         |      |  |      | 
|                                         | 1.6  |  | 1.3  | 
|                                         |      |  |      | 
|Tax
      services  advisory services   |     |  | 0.3  | 
|Other
      services                     | 0.9  |  | 0.1  | 
|                                         |      |  |      | 
|                                         | 2.5  |  | 1.7  | 
|                                         |      |  |      | 

Other
  services relate to fees for the divestment of Your Communications and assistance
  with acquisitions.

4 Investment
  income

|                                                  | 2006 |  | 2005 | 
|------------------------------------------------- | ---- |  | ---- | 
|                                                  | £m   |  | £m   | 
|                                                  |      |  |      | 
|Interest
      receivable                         | 36.9 |  | 34.4 | 
|Preference
      dividends receivable             | 0.3  |  | 3.9  | 
|Foreign
      exchange gains on forward contracts | 16.8 |  |     | 
|                                                  |      |  |      | 
|                                                  | 54.0 |  | 38.3 | 
|                                                  |      |  |      | 

5 Finance
  expense

|                                                         | 2006  |  | 2005  | 
|-------------------------------------------------------- | ----- |  | ----- | 
|                                                         | £m    |  | £m    | 
|                                                         |       |  |       | 
|Interest
      payable on bank borrowings                | 335.5 |  | 318.9 | 
|Interest
      payable on finance leases                 | 3.5   |  | 3.2   | 
|                                                         |       |  |       | 
|Other
      finance expense                              | 339.0 |  | 322.1 | 
|Fair
      value loss on debt and derivative instruments | 15.7  |  |      | 
|                                                         |       |  |       | 
|                                                         | 354.7 |  | 322.1 | 
|                                                         |       |  |       | 



|United
          Utilities Annual Report & Accounts 2006 | 79
|-------------------------------------------------------- | --

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|                                                               |                            | 
|-------------------------------------------------------------- | -------------------------- | 
|                                                               | Financial
      statements | 
|                                                               |                            | 
|                                                               |                            | 
|                                                               |                            | 
|Notes
      to the consolidated financial statements continued
|                                                               |                            | 



6 Taxation

|                              | 2006  |   | 2005  |  
|----------------------------- | ----- | - | ----- | -
|*Continuing
      operations* | £m    |   | £m    |  
|                              |       |   |       |  
|Current
      tax:            |       |   |       |  
|UK
      corporation tax      | 57.4  |   | (0.5  | )
|Foreign
      tax             | 3.4   |   | 1.7   |  
|Prior
      year              | (13.1 | ) | (31.2 | )
|Deferred
      tax:           |       |   |       |  
|Current
      year            | 64.6  |   | 102.5 |  
|Prior
      year              | 8.0   |   | 23.6  |  
|                              |       |   |       |  
|Total
      tax charge        | 120.3 |   | 96.1  |  
|                              |       |   |       |  
|                              |       |   |       |  

|                                           | 2006  |   | 2005 |  
|------------------------------------------ | ----- | - | ---- | -
|*Discontinued
      operation*             | £m    |   | £m   |  
|                                           |       |   |      |  
|Current
      tax:                         |       |   |      |  
|UK
      corporation tax                   | (46.9 | ) | (1.7 | )
|Prior
      year                           | 11.2  |   |     |  
|Deferred
      tax:                        |       |   |      |  
|Current
      year                         | (11.6 | ) | (0.4 | )
|Prior
      year                           | (16.3 | ) |     |  
|                                           |       |   |      |  
|Total
      tax credit for the period/year | (63.6 | ) | (2.1 | )
|                                           |       |   |      |  

The tables
  below reconcile the notional tax charge at the UK corporation tax rate to the
  effective tax rate for the year:

|                                                           |       |   | 2006 |   |       |   | 2005 |  
|---------------------------------------------------------- | ----- | - | ---- | - | ----- | - | ---- | -
|*Continuing
      operations*                              | £m    |   | %    |   | £m    |   | %    |  
|                                                           |       |   |      |   |       |   |      |  
|Profit
      before tax                                    | 439.3 |   |      |   | 367.6 |   |      |  
|                                                           |       |   |      |   |       |   |      |  
|Tax
      at the UK corporation tax rate of 30%            | 131.8 |   | 30.0 |   | 110.3 |   | 30.0 |  
|Adjustments
      in respect of prior period               | (5.1  | ) | (1.2 | ) | (7.6  | ) | (2.1 | )
|Net
      income not taxable less expenses not deductible  | (6.4  | ) | (1.4 | ) | (6.6  | ) | (1.8 | )
|                                                           |       |   |      |   |       |   |      |  
|Total
      tax charge and effective tax rate for the year | 120.3 |   | 27.4 |   | 96.1  |   | 26.1 |  
|                                                           |       |   |      |   |       |   |      |  
|                                                           |       |   |      |   |       |   |      |  

|                                                                                    |       |   | 2006  |   |       |   | 2005  |  
|----------------------------------------------------------------------------------- | ----- | - | ----- | - | ----- | - | ----- | -
|*Discontinued
      operation*                                                      | £m    |   | %     |   | £m    |   | %     |  
|                                                                                    |       |   |       |   |       |   |       |  
|Loss
      before tax                                                               | (17.6 | ) |       |   | (11.5 | ) |       |  
|                                                                                    |       |   |       |   |       |   |       |  
|Tax
      at the UK corporation tax rate of 30%                                     | (5.3  | ) | (30.0 | ) | (3.5  | ) | (30.0 | )
|Adjustments
      in respect of prior period                                        | (3.3  | ) | (18.9 | ) | 1.4   |   | 11.7  |  
|                                                                                    |       |   |       |   |       |   |       |  
|Total
      tax credit and effective tax rate for the period/year on operating loss | (8.6  | ) | (48.9 | ) | (2.1  | ) | (18.3 | )
|                                                                                    |       |   |       |   |       |   |       |  

7 Discontinued
  operation

On 26
  February 2006, the group sold the Your Communications business as part of the
  declared strategy of a progressive exit from the telecoms market. The purchaser
  was THUS Group plc and the consideration comprised an initial consideration
  of 391,532,832 ordinary shares with a market value of 15.5 pence each (in aggregate
  £60.7 million), together with the option to acquire up to a further 4.8
  per cent of shares in THUS Group plc dependent upon the future share price of
  THUS Group plc. This option is valued at £13.2 million at 31 March 2006
  and is held within non-current derivative assets (see note 18). The results
  of Your Communications have been disclosed as a discontinued operation in the
  groups financial statements. The detailed trading results and gain on
  disposal of Your Communications for the period ended

26 February
  2006 and the loss for the year ended 31 March 2005 is provided in note 1. Cashflows
  in relation to the discontinued operation are separately disclosed in the groups
  cashflow statement.

The net
  assets of Your Communications at the date of disposal and at 31 March 2005 were
  as follows:

|                                                                                                                               | 26
      February 2006 |   | 31
      March 2005 |  
|------------------------------------------------------------------------------------------------------------------------------ | ---------------------- | - | ------------------- | -
|                                                                                                                               | £m                     |   | £m                  |  
|                                                                                                                               |                        |   |                     |  
|Other
      intangible assets                                                                                                  | 7.9                    |   | 54.1                |  
|Property,
      plant and equipment                                                                                            | 55.8                   |   | 165.7               |  
|Inventories                                                                                                                    | 7.4                    |   | 4.2                 |  
|Trade
      receivables                                                                                                        | 40.3                   |   | 48.1                |  
|Cash
      and short-term deposits                                                                                             |                       |   | 8.7                 |  
|Retirement
      benefit (obligation)/surplus                                                                                  | (8.3                   | ) | 2.8                 |  
|Trade
      payables                                                                                                           | (25.7                  | ) | (40.5               | )
|Non-current
      liabilities                                                                                                  | (0.2                   | ) | (0.5                | )
|                                                                                                                               |                        |   |                     |  
|                                                                                                                               | 77.2                   |   | 242.6               |  
|                                                                                                                               |                        |   |                     |  
|Loss
      on disposal before taxation                                                                                         | (9.1                   | ) |                     |  
|                                                                                                                               |                        |   |                     |  
|Total
      fair value of consideration satisfied by ordinary shares and contingent
      share options less transaction costs | 68.1                   |   |                     |  
|                                                                                                                               |                        |   |                     |  



|80 | United Utilities Annual Report & Accounts 2006
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| |  |                           
| |  | --------------------------
| |  | Financial
      statements
| |  |                           
| |  |                           
| |  |                           
| |  |                           
| |  |                           



8
  Dividends

|                                                                                                                  | 2006  |  | 2005  | 
|----------------------------------------------------------------------------------------------------------------- | ----- |  | ----- | 
|                                                                                                                  | £m    |  | £m    | 
|                                                                                                                  |       |  |       | 
|Amounts
      recognised as distributions to equity holders in the year comprise:                                 |       |  |       | 
|Ordinary
      shares:                                                                                            |       |  |       | 
|Final
      dividend for the year ended 31 March 2005 at 28.61 pence per share (2004:
      29.88 pence)          | 172.0 |  | 166.5 | 
|Interim
      dividend for the year ended 31 March 2006 at 14.29 pence per share (2005:
      13.82 pence)        | 124.8 |  | 82.4  | 
|A
      shares:                                                                                                   |       |  |       | 
|Final
      dividend for the year ended 31 March 2005 at 14.307 pence per share (2004:
      14.90 pence)         | 47.4  |  | 46.2  | 
|Interim
      dividend for the year ended 31 March 2006 at nil pence per share (2005:
      6.908 pence)          |      |  | 22.9  | 
|                                                                                                                  |       |  |       | 
|                                                                                                                  | 344.2 |  | 318.0 | 
|                                                                                                                  |       |  |       | 
|Proposed
      final dividend for the year ended 31 March 2006 at 29.58 pence per share
      (2005: 28.61 pence) | 259.0 |  | 219.4 | 
|                                                                                                                  |       |  |       | 

The proposed
  final dividends for the years ended 31 March 2006 and 31 March 2005 were subject
  to approval by equity holders of the company and, hence, have not been included
  as liabilities in the financial statements at 31 March 2006 and 31 March 2005
  respectively.

The first
  dividend for which the initial A shares ranked was the 2003/04 interim dividend.
  The amount of the dividend was 50 per cent of that paid on an ordinary share.
  In July 2005, following completion of the second stage of the rights issue,
  the A shares were consolidated and reclassified as ordinary shares on the basis
  of one ordinary share for two A shares.

Final
  dividends in respect of the year ended 31 March 2005 and interim dividends recognised
  in the year ended 31 March 2005 have been re-presented following the rights
  issue.

9 Earnings
  per share

|                                                                                                                | 2006    |   | 2005    |  
|--------------------------------------------------------------------------------------------------------------- | ------- | - | ------- | -
|                                                                                                                |         |   |         |  
|Profit
      for the financial year attributable to equity holders of the company                               | £207.9m |   | £260.3m |  
|                                                                                                                |         |   |         |  
|Profit
      for the financial year attributable to equity holders of the company 
      continuing operations | £318.7m |   | £269.7m |  
|                                                                                                                |         |   |         |  
|                                                                                                                |         |   |         |  
|                                                                                                                | 2006    |   | 2005    |  
|                                                                                                                |         |   |         |  
|Earnings
      per share from continuing and discontinued operations                                            |         |   |         |  
|Basic                                                                                                           | 24.3    | p | 33.3    | p
|Diluted                                                                                                         | 24.2    | p | 30.1    | p
|                                                                                                                |         |   |         |  
|Earnings
      per share from continuing operations                                                             |         |   |         |  
|Basic                                                                                                           | 37.3    | p | 34.5    | p
|Diluted                                                                                                         | 37.1    | p | 31.2    | p
|                                                                                                                |         |   |         |  

Basic
  earnings per share has been calculated by dividing profit for the financial
  year attributable to equity holders of the company by 853.9 million, being the
  weighted average number of shares in issue during the year (2005: 781.0 million
  re-presented following the rights issue).

Diluted
  earnings per share has been calculated by dividing profit for the financial
  year attributable to equity holders of the company by 858.4 million, being the
  weighted average number of shares in issue during the year including dilutive
  shares (2005: 865.2 million re-presented following the rights issue).

The weighted
  average number of shares can be reconciled to the weighted average number of
  shares including dilutive shares as follows:

|                                                                                               | 2006    |   | 2005    |  
|---------------------------------------------------------------------------------------------- | ------- | - | ------- | -
|                                                                                               | million |   | million |  
|                                                                                               |         |   |         |  
|Average
      number of ordinary shares in issue  basic                                       | 853.9   |   | 781.0   |  
|Average
      number of potentially dilutive ordinary shares under option                      | 9.1     |   | 14.7    |  
|Number
      of ordinary shares that would have been issued at fair value                      | (4.6    | ) | (8.8    | )
|Number
      of A shares issued in 2005 (ordinary share equivalent)                            |        |   | 169.6   |  
|Number
      of A shares that would have been issued at fair value (ordinary share equivalent) |        |   | (91.3   | )
|                                                                                               |         |   |         |  
|Average
      number of ordinary shares  diluted                                              | 858.4   |   | 865.2   |  
|                                                                                               |         |   |         |  

The
    five-for-nine rights issue, structured so that the proceeds were received
    in two stages, was
  approved at the extraordinary general meeting of shareholders on 26 August
    2003. The first tranche of the proceeds, received during September 2003,
    raised
  £501.2 million (net of costs) from issuing 309,286,997 A shares. The
  second  tranche of proceeds received in June 2005 raised £508.1 million
  (net of  costs), reflecting the subscription of 309,286,997 further A shares.
  In July
  2005, all A shares were then consolidated and reclassified as ordinary shares
   on the basis of one ordinary share for two A shares.

For the
  purposes of calculating the weighted average number of shares used in the earnings
  per share calculations, the A shares have been treated as part paid ordinary
  shares, two A shares being equivalent to one ordinary share, for the period
  prior to their consolidation as ordinary shares in July 2005.

The difference
  between the weighted average number of shares used in the basic and the diluted
  earnings per share calculations represents those ordinary shares deemed to have
  been issued for no consideration on the conversion of all potential dilutive
  ordinary shares in accordance with IAS 33 Earnings Per Share.



|United
          Utilities Annual Report & Accounts 2006 | 81
|-------------------------------------------------------- | --

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| |                            | 
| | -------------------------- | 
| | Financial
      statements | 
| |                            | 
| |                            | 

|                                                                 |  |  | 
|---------------------------------------------------------------- |  |  | 
|Notes
        to the consolidated financial statements continued |  |  | 
|                                                                 |  |  | 



9 Earnings
    per sharecontinued

The basic
  and diluted weighted average number of shares have been re-presented for all
  periods prior to the second stage of the rights issue to reflect the bonus element
  of the rights issue as required by IAS 33. The adjustment factor, based on the
  consideration received from the second stage of the rights issue, is 1.0962,
  calculated using 653.5 pence per ordinary share, being the closing price on
  27 June 2005, the last day on which A shares were traded with the rights.

10 Property, plant and equipment

|                                          |                |   |                |   |             |   | Fixtures,       |   |                 |   |          |  
|----------------------------------------- | -------------- | - | -------------- | - | ----------- | - | --------------- | - | --------------- | - | -------- | -
|                                          |                |   |                |   |             |   | fittings,       |   | Assets
      in |   |          |  
|                                          | Land
      and |   | Infrastructure |   | Operational |   | tools
      and |   | course
      of |   |          |  
|                                          | buildings      |   | assets         |   | assets      |   | equipment       |   | construction    |   | Total    |  
|Group                                     | £m             |   | £m             |   | £m          |   | £m              |   | £m              |   | £m       |  
|                                          |                |   |                |   |             |   |                 |   |                 |   |          |  
|                                          |                |   |                |   |             |   |                 |   |                 |   |          |  
|Cost                                      |                |   |                |   |             |   |                 |   |                 |   |          |  
|At
      1 April 2004                     | 356.6          |   | 2,821.1        |   | 5,097.8     |   | 512.5           |   | 1,142.5         |   | 9,930.5  |  
|Additions                                 | 3.1            |   | 72.7           |   | 142.8       |   | 54.7            |   | 567.7           |   | 841.0    |  
|Transfers                                 | 4.9            |   | 145.7          |   | 300.9       |   | 46.5            |   | (498.0          | ) |         |  
|Disposals                                 | (12.5          | ) | (17.4          | ) | (65.4       | ) | (68.0           | ) | (5.0            | ) | (168.3   | )
|Currency
      translation differences    |               |   | 4.7            |   |            |   |                |   |                |   | 4.7      |  
|                                          |                |   |                |   |             |   |                 |   |                 |   |          |  
|At
      31 March 2005                    | 352.1          |   | 3,026.8        |   | 5,476.1     |   | 545.7           |   | 1,207.2         |   | 10,607.9 |  
|                                          |                |   |                |   |             |   |                 |   |                 |   |          |  
|Additions                                 | 9.7            |   | 47.9           |   | 173.4       |   | 38.7            |   | 269.7           |   | 539.4    |  
|Acquisitions                              |               |   |               |   |            |   | 4.6             |   |                |   | 4.6      |  
|Transfers                                 | (5.3           | ) | 136.7          |   | 501.6       |   | 24.1            |   | (672.7          | ) | (15.6    | )
|Disposals                                 | (11.9          | ) | (13.4          | ) | (286.5      | ) | (100.8          | ) | (14.0           | ) | (426.6   | )
|Currency
      translation differences    | 0.1            |   | 2.6            |   | (0.2        | ) | 0.1             |   | 0.1             |   | 2.7      |  
|                                          |                |   |                |   |             |   |                 |   |                 |   |          |  
|At
      31 March 2006                    | 344.7          |   | 3,200.6        |   | 5,864.4     |   | 512.4           |   | 790.3           |   | 10,712.4 |  
|                                          |                |   |                |   |             |   |                 |   |                 |   |          |  
|                                          |                |   |                |   |             |   |                 |   |                 |   |          |  
|Accumulated
      depreciation            |                |   |                |   |             |   |                 |   |                 |   |          |  
|At
      1 April 2004                     | 103.0          |   | 42.3           |   | 1,510.9     |   | 289.8           |   |                |   | 1,946.0  |  
|Charge
      for the year                 | 11.8           |   | 28.4           |   | 182.3       |   | 66.7            |   |                |   | 289.2    |  
|Transfers                                 |               |   |               |   | (0.2        | ) | 0.2             |   |                |   |         |  
|Disposals                                 | (9.6           | ) | (4.6           | ) | (22.7       | ) | (67.1           | ) |                |   | (104.0   | )
|Currency
      translation differences    |               |   | 2.2            |   |            |   |                |   |                |   | 2.2      |  
|                                          |                |   |                |   |             |   |                 |   |                 |   |          |  
|At
      31 March 2005                    | 105.2          |   | 68.3           |   | 1,670.3     |   | 289.6           |   |                |   | 2,133.4  |  
|                                          |                |   |                |   |             |   |                 |   |                 |   |          |  
|Charge
      for the year                 | 12.6           |   | 27.3           |   | 192.5       |   | 45.8            |   |                |   | 278.2    |  
|Transfers                                 | (7.8           | ) |               |   | (0.1        | ) | (2.0            | ) |                |   | (9.9     | )
|Disposals                                 | (6.1           | ) | (5.0           | ) | (238.4      | ) | (82.7           | ) | (7.1            | ) | (339.3   | )
|Adjustment
      to value (see notes 1,7) |               |   |               |   | 88.8        |   | 9.5             |   | 7.1             |   | 105.4    |  
|Currency
      translation differences    |               |   | 0.6            |   | (0.1        | ) | 0.2             |   |                |   | 0.7      |  
|                                          |                |   |                |   |             |   |                 |   |                 |   |          |  
|At
      31 March 2006                    | 103.9          |   | 91.2           |   | 1,713.0     |   | 260.4           |   |                |   | 2,168.5  |  
|                                          |                |   |                |   |             |   |                 |   |                 |   |          |  
|                                          |                |   |                |   |             |   |                 |   |                 |   |          |  
|Net
      book value at 31 March 2006     | 240.8          |   | 3,109.4        |   | 4,151.4     |   | 252.0           |   | 790.3           |   | 8,543.9  |  
|                                          |                |   |                |   |             |   |                 |   |                 |   |          |  
|                                          |                |   |                |   |             |   |                 |   |                 |   |          |  
|Net
      book value at 31 March 2005     | 246.9          |   | 2,958.5        |   | 3,805.8     |   | 256.1           |   | 1,207.2         |   | 8,474.5  |  
|                                          |                |   |                |   |             |   |                 |   |                 |   |          |  

The carrying
  amount of the groups operational assets, fixtures, fittings, tools and
  equipment includes an amount of £68.1 million (2005: £69.6 million)
  in respect of assets held under finance leases.

At 31
  March 2006, the group had entered into contractual commitments for the acquisition
  of property, plant and equipment amounting to £183.1 million (2005: £263.0
  million).



|82 | United Utilities Annual Report & Accounts 2006
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| |  |                           
| |  | --------------------------
| |  | Financial
      statements
| |  |                           
| |  |                           

| |  |  | 
| |  |  | 
| |  |  | 
| |  |  | 



10
  Property, plant and equipmentcontinued

|                                                        | Fixtures,       | 
|------------------------------------------------------- | --------------- | 
|                                                        | fittings,       | 
|                                                        | tools
      and | 
|                                                        | equipment       | 
|Company                                                 | £m              | 
|                                                        |                 | 
|Cost                                                    |                 | 
|At
      1 April 2004, 31 March 2005 and 31 March 2006  | 4.8             | 
|                                                        |                 | 
|Accumulated
      depreciation                          |                 | 
|At
      1 April 2004                                   | 3.9             | 
|Charge
      for the year                               | 0.1             | 
|                                                        |                 | 
|At
      31 March 2005 and 31 March 2006                | 4.0             | 
|                                                        |                 | 
|                                                        |                 | 
|Net
      book value at 31 March 2005 and 31 March 2006 | 0.8             | 
|                                                        |                 | 

The company
  had no contractual commitments for the acquisition of property, plant and equipment
  at 31 March 2006 or 31 March 2005.

11
  Goodwill

|Group                                     | £m    |  
|----------------------------------------- | ----- | -
|                                          |       |  
|Cost                                      |       |  
|At
      1 April 2004                     | 86.8  |  
|Additions                                 | 26.8  |  
|Disposals                                 | (11.0 | )
|Currency
      translation differences    | (2.0  | )
|                                          |       |  
|At
      31 March 2005                    | 100.6 |  
|Additions                                 | 75.5  |  
|Adjustment
      to value (see notes 1,7) | (24.4 | )
|Currency
      translation differences    | 1.4   |  
|                                          |       |  
|At
      31 March 2006                    | 153.1 |  
|                                          |       |  
|

Goodwill
  is subject to annual impairment testing, or more frequently if there are indications
  of impairment. The recoverable amounts of the cash-generating units (CGUs)
  are determined from value-in-use calculations that use amounts from approved
  budgets and plans. The discount rate applied to the cashflow projections was
  11.9 per cent. The range of growth rates used of 2.5 to 3.0 per cent was based
  on industry growth rates.

Goodwill
  is allocated to the appropriate CGU identified according to the business segment.
  The net book value of goodwill by these segments was as follows:

|                                                     |       |  | Group | 
|---------------------------------------------------- | ----- |  | ----- | 
|                                                     |       |  |       | 
|                                                     | 2006  |  | 2005  | 
|                                                     | £m    |  | £m    | 
|                                                     |       |  |       | 
|Telecommunicationsn
        (discontinued operation) |      |  | 23.4  | 
|Infrastructure
      management                      | 6.2   |  | 6.2   | 
|Business
      process outsourcing                   | 146.9 |  | 71.0  | 
|                                                     |       |  |       | 
|                                                     | 153.1 |  | 100.6 | 
|                                                     |       |  |       | 

During
  the year, an impairment, described herein as adjustment to value, of £24.4
  million was recognised in respect of the goodwill of the telecommunications
  division, Your Communications (see notes 1 and 7).

There
  have been no other goodwill impairments identified during the year.



|United
          Utilities Annual Report & Accounts 2006 | 83
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| |                            | 
| | -------------------------- | 
| | Financial
      statements | 
| |                            | 
| |                            | 

|                                                                 |  |  | 
|---------------------------------------------------------------- |  |  | 
|Notes
        to the consolidated financial statements continued |  |  | 
|                                                                 |  |  | 



12 Other intangible assets

|                                             | Computer |   |       |   |        |  
|-------------------------------------------- | -------- | - | ----- | - | ------ | -
|                                             | software |   | Other |   | Total  |  
|Group                                        | £m       |   | £m    |   | £m     |  
|                                             |          |   |       |   |        |  
|Cost                                         |          |   |       |   |        |  
|At
      1 April 2004                        | 393.2    |   | 109.6 |   | 502.8  |  
|Additions
       purchased                  | 34.1     |   | 0.7   |   | 34.8   |  
|Disposals                                    | (33.6    | ) | (2.5  | ) | (36.1  | )
|                                             |          |   |       |   |        |  
|At
      31 March 2005                       | 393.7    |   | 107.8 |   | 501.5  |  
|Additions
       internally generated       | 1.2      |   |      |   | 1.2    |  
|Additions
       purchased                  | 51.7     |   | 0.3   |   | 52.0   |  
|Acquisitions                                 | 5.7      |   | 93.4  |   | 99.1   |  
|Disposals                                    | (159.9   | ) | (70.6 | ) | (230.5 | )
|                                             |          |   |       |   |        |  
|At
      31 March 2006                       | 292.4    |   | 130.9 |   | 423.3  |  
|                                             |          |   |       |   |        |  
|                                             |          |   |       |   |        |  
|Amortisation
      and adjustment to value   |          |   |       |   |        |  
|At
      1 April 2004                        | 224.2    |   | 48.9  |   | 273.1  |  
|Charge
      for the year                    | 59.7     |   | 9.5   |   | 69.2   |  
|Disposals                                    | (33.6    | ) |      |   | (33.6  | )
|                                             |          |   |       |   |        |  
|At
      31 March 2005                       | 250.3    |   | 58.4  |   | 308.7  |  
|Charge
      for the year                    | 45.5     |   | 14.7  |   | 60.2   |  
|Disposals                                    | (138.4   | ) | (61.3 | ) | (199.7 | )
|Adjustment
         to value (see notes 1,7) |         |   | 17.9  |   | 17.9   |  
|                                             |          |   |       |   |        |  
|At
      31 March 2006                       | 157.4    |   | 29.7  |   | 187.1  |  
|                                             |          |   |       |   |        |  
|                                             |          |   |       |   |        |  
|Net
      book value at 31 March 2006        | 135.0    |   | 101.2 |   | 236.2  |  
|                                             |          |   |       |   |        |  
|                                             |          |   |       |   |        |  
|Net
      book value at 31 March 2005        | 143.4    |   | 49.4  |   | 192.8  |  
|                                             |          |   |       |   |        |  

At 31
  March 2006, the group had entered into contractual commitments for the acquisition
  of other intangible assets amounting to £3.0 million (2005: £69.0
  million). The company had no contractual commitments for the acquisition of
  other intangible assets at 31 March 2006 or31March
  2005.

The other
  intangible assets category relates mainly to customer related intangibles such
  as customer contracts and customer lists.



|84 | United Utilities Annual Report & Accounts 2006
|-- | ----------------------------------------------

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| |  |                     
| |  | --------------------
| |  | Financial statements
| |  |                     
| |  |                     

|
|
|
|



13
  Investments

Non-current asset investments

|                                        | Shares
      in subsidiary |  
|--------------------------------------- | -------------------------- | -
|                                        | undertakings               |  
|Company                                 | £m                         |  
|                                        |                            |  
|Cost                                    |                            |  
|At
      1 April 2004                   | 5,738.4                    |  
|Additions                               | 295.7                      |  
|Adjustment
      to value (see note 23) | (1,201.0                   | )
|                                        |                            |  
|At
      31 March 2005                  | 4,833.1                    |  
|Additions                               | 668.6                      |  
|                                        |                            |  
|At
      31 March 2006                  | 5,501.7                    |  
|                                        |                            |  
|                                        |                            |  
|

|                             |           |  | Other       |   |       |  
|---------------------------- | --------- |  | ----------- | - | ----- | -
|                             | Associate |  | investments |   | Total |  
|Group                        | £m        |  | £m          |   | £m    |  
|                             |           |  |             |   |       |  
|Cost                         |           |  |             |   |       |  
|At 1 April 2004              |          |  | 3.0         |   | 3.0   |  
|Additions                    |          |  | 0.3         |   | 0.3   |  
|Disposals                    |          |  | (2.2        | ) | (2.2  | )
|Transfer from joint ventures |          |  | 8.9         |   | 8.9   |  
|Exchange adjustments         |          |  | (0.3        | ) | (0.3  | )
|                             |           |  |             |   |       |  
|At 31 March 2005             |          |  | 9.7         |   | 9.7   |  
|Additions                    | 60.7      |  | 85.7        |   | 146.4 |  
|Disposals                    |          |  | (0.4        | ) | (0.4  | )
|Revaluation                  |          |  | 14.6        |   | 14.6  |  
|Exchange adjustments         |          |  | 0.4         |   | 0.4   |  
|                             |           |  |             |   |       |  
|At 31 March 2006             | 60.7      |  | 110.0       |   | 170.7 |  
|                             |           |  |             |   |       |  

On 1
  June 2005, the group acquired a 15 per cent shareholding in Northern Gas Network
  Holdings Limited. In the opinion of the directors, there is no material difference
  between the book and fair values of this investment.

On
  26 February 2006, the group acquired 391,532,832 ordinary shares in THUS Group
  plc as consideration for the sale of the Your Communications business (see notes
  1 and 7). This investment, in listed equity securities, presents the group with
  opportunity for return through dividend income and trading gains. These securities
  have no fixed maturity or coupon rate. In the opinion of the directors, there
  is no material difference between the book and fair values of this investment.

The
  groups 21.7 per cent investment in THUS Group plc qualifies as an associate
  in accordance with IAS 28 Investments in Associates. Equity accounting
  has been applied in respect of this investment in the groups financial
  statements. However, the groups share of the post acquisition results
  for the five weeks ended 31 March 2006 has not been separately disclosed in
  the income statement or statement of recognised income and expense on the grounds
  of materiality.



|United Utilities Annual Report & Accounts 2006 | 85
|---------------------------------------------- | --

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| |                          | 
| | ------------------------ | 
| | Financial
    statements | 
| |                          | 
| |                          | 

|                                                            
|------------------------------------------------------------
|Notes
    to the consolidated financial statements continued
|                                                            



13
  Investmentscontinued

Details
  of principal operating subsidiary undertakings, unlisted joint ventures and
  associates, are set out below. These undertakings are included within the consolidated
  group financial statements.

|                                                                                                                                                    | Class
      of share |  | Proportion
      of share capital |  | Nature
      of                                                                                 
|--------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- |  | --------------------------------- |  | ------------------------------------------------------------------------------------------------
|                                                                                                                                                    | capital
      held   |  | owned/voting
      rights         |  | business                                                                                        
|                                                                                                                                                    |                      |  |                                   |  |                                                                                                 
|Subsidiary
      undertakings:                                                                                                                      |                      |  |                                   |  |                                                                                                 
|Great
      Britain:                                                                                                                                |                      |  |                                   |  |                                                                                                 
|United
      Utilities Water PLC                                                                                                                    | Ordinary             |  | 100%*                             |  | Water
      and wastewater services and network management                                      
|United
      Utilities Electricity PLC                                                                                                              | Ordinary             |  | 100%*                             |  | Electricity
      distribution and related services                                             
|Vertex
      Data Science Limited                                                                                                                   | Ordinary             |  | 100%                              |  | Business
      process outsourcing                                                              
|Vertex
      Customer Management Limited                                                                                                            | Ordinary             |  | 100%*                             |  | Business
      process outsourcing                                                              
|Vertex
      Financial Services Holdings Limited                                                                                                    | Ordinary             |  | 100%*                             |  | Financial
      services outsourcing                                                            
|1st
         Software Group Limited                                                                                                                 | Ordinary             |  | 100%                              |  | Financial
      services software                                                               
|United
      Utilities International Limited                                                                                                        | Ordinary             |  | 100%*                             |  | Consulting
      services and project management                                                
|United
      Utilities Facilities Management Limited                                                                                                | Ordinary             |  | 100%*                             |  | Facilities
      management                                                                     
|United
      Utilities Waste Management Limited                                                                                                     | Ordinary             |  | 100%*                             |  | Waste
      management                                                                          
|United
      Utilities Industrial (Gwent) Limited                                                                                                   | Ordinary             |  | 100%*                             |  | Waste
      management                                                                          
|United
      Utilities Industrial Limited                                                                                                           | Ordinary             |  | 100%*                             |  | Water
      treatment operations                                                                
|United
      Utilities Property Solutions Limited                                                                                                   | Ordinary             |  | 100%                              |  | Property
      management                                                                       
|United
      Utilities Operational Services Limited                                                                                                 | Ordinary             |  | 100%*                             |  | Operation
         and maintenance of water
      and wastewater assets of Dwr Cymru Welsh Water
|United
      Utilities Operational Services (Highland) Limited                                                                                      | Ordinary             |  | 100%*                             |  | Operation
      and maintenance of wastewater assets                                            
|United
      Utilities Operational Services (Tay) Limited                                                                                           | Ordinary             |  | 100%*                             |  | Operation
      and maintenance of wastewater assets                                            
|United
      Utilities Operational Services (Moray) Limited                                                                                         | Ordinary             |  | 100%*                             |  | Operation
      and maintenance of wastewater assets                                            
|United
      Utilities Networks Limited                                                                                                             | Ordinary             |  | 100%*                             |  | Multi-utility
      metering and network operations                                             
|United
      Utilities Operations Limited                                                                                                           | Ordinary             |  | 100%*                             |  | Operation
      and maintenance of Northern Gas Networks                                       
|                                                                                                                                                    |                      |  |                                   |  | gas
      assets and management of capital programme                                            
|                                                                                                                                                    |                      |  |                                   |  |                                                                                                 
|Australia:                                                                                                                                          |                      |  |                                   |  |                                                                                                 
|United
      Utilities Australia Pty Limited                                                                                                        | Ordinary             |  | 100%*                             |  | Water
      treatment operations, technical andmanagement
      services                        
|United
      Utilities Macarthur Operations Pty Limited                                                                                             | Ordinary             |  | 100%*                             |  | Technical
      and management services                                                         
|Yabulu
      Water Pty Limited                                                                                                                      | Ordinary             |  | 100%*                             |  | Technical
      and management services                                                         
|United
      Utilities Victor Harbor Pty Limited                                                                                                    | Ordinary             |  | 100%*                             |  | Water
      treatment operations                                                                
|Onkaparinga
      Pty Limited                                                                                                                       | Ordinary             |  | 100%*                             |  | Technical
      and management services                                                         
|                                                                                                                                                    |                      |  |                                   |  |                                                                                                 
|Canada:                                                                                                                                             |                      |  |                                   |  |                                                                                                 
|Vertex
      Customer Management (Canada) Limited                                                                                                   | Ordinary             |  | 100%*                             |  | Business
      process outsourcing                                                              
|                                                                                                                                                    |                      |  |                                   |  |                                                                                                 
|United
      States:                                                                                                                                |                      |  |                                   |  |                                                                                                 
|First
      Revenue Assurance LLC                                                                                                                   | Ordinary             |  | 100%*                             |  | Debt
      collection agency                                                                    
|                                                                                                                                                    |                      |  |                                   |  |                                                                                                 
|India:                                                                                                                                              |                      |  |                                   |  |                                                                                                 
|Vertex
      Customer Services India Private Limited                                                                                                | Ordinary             |  | 75%*                              |  | Business
      process outsourcing                                                              
|                                                                                                                                                    |                      |  |                                   |  |                                                                                                 
|                                                                                                                                                    |                      |  |                                   |  |                                                                                                 
|Joint
      ventures:                                                                                                                               |                      |  |                                   |  |                                                                                                 
|Great
      Britain:                                                                                                                                |                      |  |                                   |  |                                                                                                 
|Catchment
      Limited                                                                                                                             | Ordinary             |  | 50%*                              |  | Contract
      operations and maintenance services                                              
|Catchment
      (Tay) Limited                                                                                                                       | Ordinary             |  | 33%*                              |  | Contract
      operations and maintenance services                                              
|Catchment
      (Moray) Limited                                                                                                                     | Ordinary             |  | 33%*                              |  | Contract
      operations and maintenance services                                              
|Meter
      Serve (North West) Limited                                                                                                              | Ordinary             |  | 50%*                              |  | Metering
      services                                                                         
|Meter
      Serve (North East) Limited                                                                                                              | Ordinary             |  | 50%*                              |  | Metering
      services                                                                         
|UUGM
      Limited                                                                                                                                  | Ordinary             |  | 60%*                              |  | Consulting
      services and project management                                                
|4Delivery
      Limited                                                                                                                             | Ordinary             |  | 40%*                              |  | Consulting
      services and project management                                                
|                                                                                                                                                    |                      |  |                                   |  |                                                                                                 
|Australia:                                                                                                                                          |                      |  |                                   |  |                                                                                                 
|Yan
      Yean Water Pty Limited                                                                                                                    | Ordinary             |  | 50%*                              |  | Water
      treatment operations                                                                
|Macarthur
      Water Pty Limited                                                                                                                   | Ordinary             |  | 50%*                              |  | Water
      treatment operations                                                                
|Riverland
      Water Pty Limited                                                                                                                   | Ordinary             |  | 50%*                              |  | Water
      treatment operations                                                                
|Campaspe
      Asset Management Services Pty Limited                                                                                                | Ordinary             |  | 50%*                              |  | Asset
      management and water treatment                                                      
|                                                                                                                                                    |                      |  |                                   |  |                                                                                                 
|Estonia:                                                                                                                                            |                      |  |                                   |  |                                                                                                 
|AS
      Tallinna Vesi                                                                                                                              | Ordinary             |  | 26.5%*                            |  | Contract
      operations and maintenance services                                              
|                                                                                                                                                    |                      |  |                                   |  |                                                                                                 
|Bulgaria:                                                                                                                                           |                      |  |                                   |  |                                                                                                 
|Sofijska
      Voda A.D.                                                                                                                            | Ordinary             |  | 59.6%*                            |  | Contract
      operations and maintenance services                                              
|                                                                                                                                                    |                      |  |                                   |  |                                                                                                 
|Poland:                                                                                                                                             |                      |  |                                   |  |                                                                                                 
|Aqua
      SA                                                                                                                                       | Ordinary             |  | 33.2%*                            |  | Contract
      operations and maintenance services                                              
|                                                                                                                                                    |                      |  |                                   |  |                                                                                                 
|Associates:                                                                                                                                         |                      |  |                                   |  |                                                                                                 
|Great
      Britain:                                                                                                                                |                      |  |                                   |  |                                                                                                 
|THUS
      Group plc                                                                                                                                | Ordinary             |  | 21.7%                             |  | Telecommunications                                                                              
|                                                                                                                                                    |                      |  |                                   |  |                                                                                                 
|                                                                                                                                                    |                      |  |                                   |  |                                                                                                 
|*
      Shares are held directly by United Utilities PLC except where marked with
      an asterisk where they are held by subsidiary undertakings.



|86 | United
    Utilities Annual Report & Accounts 2006
|-- | --------------------------------------------------

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| |  |                     
| |  | --------------------
| |  | Financial statements
| |  |                     

|
|
|
|



13
  Investmentscontinued

A full
  list of the companys subsidiary undertakings is included within the companys
  annual return.

In
  relation to the groups interests in joint ventures and the financial performance
  of the groups associate, the assets, liabilities, gross income and expenses
  are summarised below.

|                              |                         |   |                         |   |                      |   | Group
      share of: |  
|----------------------------- | ----------------------- | - | ----------------------- | - | -------------------- | - | --------------------- | -
|                              |                         |   |                         |   |                      |   |                       |  
|                              | Associate               |   | Associate               |   | Joint
      ventures |   | Joint
      ventures  |  
|                              | 30
      September 2005 |   | 30
      September 2004 |   | 31
      March 2006  |   | 31
      March 2005   |  
|                              | £m                      |   | £m                      |   | £m                   |   | £m                    |  
|                              |                         |   |                         |   |                      |   |                       |  
|Non-current
      assets      | 364.8                   |   | 385.7                   |   | 263.8                |   | 220.3                 |  
|Current
      assets          | 92.1                    |   | 118.2                   |   | 106.9                |   | 60.7                  |  
|Non-current
      liabilities | (42.4                   | ) | (55.8                   | ) | (215.6               | ) | (179.9                | )
|Current
      liabilities     | (89.5                   | ) | (101.3                  | ) | (69.4                | ) | (30.6                 | )
|                              |                         |   |                         |   |                      |   |                       |  
|                              | 325.0                   |   | 346.8                   |   | 85.7                 |   | 70.5                  |  
|                              |                         |   |                         |   |                      |   |                       |  
|                              |                         |   |                         |   |                      |   |                       |  
|                              | 6
      months ended    |   | 6
      months ended    |   | Year
      ended     |   | Year
      ended      |  
|                              | 30
      September 2005 |   | 30
      September 2004 |   | 31
      March 2006  |   | 31
      March 2005   |  
|                              | £m                      |   | £m                      |   | £m                   |   | £m                    |  
|                              |                         |   |                         |   |                      |   |                       |  
|Gross
      income            | 176.8                   |   | 177.5                   |   | 165.3                |   | 114.3                 |  
|Expenses                      | (185.0                  | ) | (206.6                  | ) | (152.4               | ) | (104.8                | )
|Taxation                      | (0.3                    | ) | (0.4                    | ) | (2.8                 | ) | 2.2                   |  
|                              |                         |   |                         |   |                      |   |                       |  
|Post
      tax results        | (8.5                    | ) | (29.5                   | ) | 10.1                 |   | 11.7                  |  
|                              |                         |   |                         |   |                      |   |                       |  

The financial
  information presented in respect of the groups investment in its associate
  is derived from the latest publicly available financial statements, the interim
  financial statements as at 30 September 2005.

The
  joint ventures and associate have no significant contingent liabilities to which
  the group is exposed and the group has no significant contingent liabilities
  in relation to its interests in the joint ventures and associate.

Current
  asset investments Current
  asset investments comprise properties held for development and sale of £29.7
  million (2005: £19.7 million).

14
  Inventories

|                                       |      |  | Group | 
|-------------------------------------- | ---- |  | ----- | 
|                                       |      |  |       | 
|                                       | 2006 |  | 2005  | 
|                                       | £m   |  | £m    | 
|                                       |      |  |       | 
|Raw
      materials and finished goods | 9.4  |  | 9.8   | 
|Work
      in progress                 | 18.8 |  | 31.1  | 
|                                       |      |  |       | 
|                                       | 28.2 |  | 40.9  | 
|                                       |      |  |       | 

15
  Trade and other receivables

|                                              |       |  | Group |  |         |  | Company | 
|--------------------------------------------- | ----- |  | ----- |  | ------- |  | ------- | 
|                                              |       |  |       |  |         |  |         | 
|                                              | 2006  |  | 2005  |  | 2006    |  | 2005    | 
|                                              | £m    |  | £m    |  | £m      |  | £m      | 
|                                              |       |  |       |  |         |  |         | 
|Trade
      receivables                       | 231.4 |  | 217.8 |  |        |  |        | 
|Amounts
      owed by subsidiary undertakings |      |  |      |  | 1,110.2 |  | 796.9   | 
|Amounts
      owed by related parties         | 0.6   |  |      |  |        |  |        | 
|Other
      debtors                           | 38.2  |  | 31.4  |  | 18.3    |  | 2.2     | 
|Prepayments
      and accrued income          | 241.9 |  | 159.2 |  | 2.1     |  |        | 
|                                              |       |  |       |  |         |  |         | 
|                                              | 512.1 |  | 408.4 |  | 1,130.6 |  | 799.1   | 
|                                              |       |  |       |  |         |  |         | 

Trade and other receivables have been analysed between non-current and current as follows:

|            |       |  | Group |  |         |  | Company | 
|----------- | ----- |  | ----- |  | ------- |  | ------- | 
|            |       |  |       |  |         |  |         | 
|            | 2006  |  | 2005  |  | 2006    |  | 2005    | 
|            | £m    |  | £m    |  | £m      |  | £m      | 
|            |       |  |       |  |         |  |         | 
|Non-current | 22.0  |  | 23.4  |  |        |  |        | 
|Current     | 490.1 |  | 385.0 |  | 1,130.6 |  | 799.1   | 
|            |       |  |       |  |         |  |         | 
|            | 512.1 |  | 408.4 |  | 1,130.6 |  | 799.1   | 
|            |       |  |       |  |         |  |         | 

Trade
  receivables do not carry interest and are stated net of allowances for doubtful
  receivables of £155.6 million (2005: £127.2 million). Allowances
  are estimated by management based on past default experience and their assessment
  of the current economic environment.

The
  group has no significant concentration of credit risk with exposure spread over
  a large number of customers.

The
  directors consider that the carrying amount of trade and other receivables approximates
  to their fair value.

The
  average credit period taken on sales ranges from 38 days to 95 days due to the
  differing nature of trade receivables in the business process outsourcing, infrastructure
  management and licensed multi-utility segments of the group.



|United Utilities Annual Report & Accounts 2006 | 87
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| | Financial
      statements | 
| |                            | 

|                                                              
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|                                                              
|Notes
      to the consolidated financial statements continued
|                                                              



16
  Cash and cash equivalents

|                                                            |         |   | Group |   |       |  | Company | 
|----------------------------------------------------------- | ------- | - | ----- | - | ----- |  | ------- | 
|                                                            |         |   |       |   |       |  |         | 
|                                                            | 2006    |   | 2005  |   | 2006  |  | 2005    | 
|                                                            | £m      |   | £m    |   | £m    |  | £m      | 
|                                                            |         |   |       |   |       |  |         | 
|Cash
      at bank and in hand                              | 127.0   |   | 90.4  |   | 120.4 |  | 153.9   | 
|Short-term
      bank deposits                              | 1,386.5 |   | 812.3 |   |      |  | 200.0   | 
|                                                            |         |   |       |   |       |  |         | 
|Cash
      and short-term deposits                          | 1,513.5 |   | 902.7 |   | 120.4 |  | 353.9   | 
|Bank
      overdrafts (included in borrowings, see note 17) | (69.6   | ) | (37.1 | ) |      |  |        | 
|                                                            |         |   |       |   |       |  |         | 
|Cash
      and cash equivalents                             | 1,443.9 |   | 865.6 |   | 120.4 |  | 353.9   | 
|                                                            |         |   |       |   |       |  |         | 

Cash and short-term deposits comprise cash at bank and in hand and other short-term highly liquid investments with a maturity of three months or less.

The effective
  interest rate on short-term deposits during the year ended 31 March 2006 was
  4.30 per cent (2005: 4.47 per cent). However, in the year ended 31 March 2006,
  short-term deposits included a large number of deposits denominated in Japanese
  yen. Excluding the impact of the Japanese yen deposits, the effective interest
  rate on short-term deposits denominated in sterling was 4.59 per cent. These
  deposits have a weighted average maturity of 13 days.

17
  Borrowings

|                                               | 2006    |  | 2005    | 
|---------------------------------------------- | ------- |  | ------- | 
|Group                                          | £m      |  | £m      | 
|                                               |         |  |         | 
|Bank
      overdrafts                          | 69.6    |  | 37.1    | 
|Bank
      loans and other loans               | 5,550.1 |  | 5,063.2 | 
|Finance
      lease obligations                | 80.5    |  | 81.0    | 
|                                               |         |  |         | 
|                                               | 5,700.2 |  | 5,181.3 | 
|                                               |         |  |         | 
|The
      borrowings are repayable as follows: |         |  |         | 
|Within
      one year                          | 619.1   |  | 512.3   | 
|From
      one to two years                    | 989.5   |  | 95.7    | 
|From
      two to three years                  | 765.3   |  | 944.3   | 
|From
      three to four years                 | 172.4   |  | 761.2   | 
|From
      four to five years                  | 18.3    |  | 177.8   | 
|After
      five years                         | 3,135.6 |  | 2,690.0 | 
|                                               |         |  |         | 
|                                               | 5,700.2 |  | 5,181.3 | 
|                                               |         |  |         | 

The group considers the following financial instruments to be significant:

|                            |                   |  | Carrying
      value | 
|--------------------------- | ----------------- |  | -------------------- | 
|Financial
      instruments | Maturity          |  | £m                   | 
|                            |                   |  |                      | 
|€1,000m
      6.625% notes  | 8
      Nov 2007  |  | 690.8                | 
|€600m
      4.875% notes    | 18
      Mar 2009 |  | 420.3                | 
|€500m
      4.25% notes     | 24
      Jan 2020 |  | 337.6                | 
|£300m
      5.625% notes    | 20
      Dec 2027 |  | 317.7                | 
|                            |                   |  |                      | 

On total
  borrowings, before the impact of derivative instruments, interest rates range
  from 0.705 per cent to 14.83 per cent on £5,050.9 million (2005: £4,542.4
  million) and are at floating rates on £649.3 million (2005: £638.9
  million).

Bank
  overdrafts Bank overdrafts
  are repayable on demand.

The weighted
  average rate of interest on bank overdrafts was 5.57 per cent (2005: 5.16 per
  cent).

Term
  loans Amounts
  repayable on term loans after more than five years, before the impact of derivative
  instruments, comprise loans repayable between 2011 and 2053. Interest rates
  range from 1.135 per cent to 14.83 per cent on £2,729.9 million (2005:
  £2,312.7 million) and are at floating rates on £405.7 million (2005:
  £377.3 million).

The weighted
  average rate of interest on term loans, before the impact of derivative instruments,
  was 5.54 per cent (2005: 5.98 per cent).

The group
  had available committed bank facilities of £1,000.0 million (2005: £875.0
  million) of which £745.4 million was unutilised at 31 March 2006 (2005:
  £873.4 million). Of the amounts unutilised, £295.0 million expires
  within one year (2005: £100.0 million), £125.0 million expires after
  one year but in less than two years (2005: £323.4 million), and the remaining
  £325.4 million expires in more than two years (2005: £450.0 million).

Finance
  leases An analysis
  of finance lease repayments is given in note 25.

The weighted
  average interest rate on finance leases was 6.37 per cent (2005: 5.97 per cent).



|88 | United Utilities Annual Report & Accounts 2006
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| |  | --------------------------
| |  | Financial
      statements
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|
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|
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|



17
  Borrowingscontinued
  Funding
  raised in foreign currency is swapped to sterling to match funding costs to
  income. The analysis of borrowings below details the currency in which items
  were raised and the amounts involved before and after currency hedging.

The group
  borrowings were denominated in the following currencies:

|                            | Currency             |   | Currency            |   |         | 
|--------------------------- | -------------------- | - | ------------------- | - | ------- | 
|                            | before
      hedging |   | after
      hedging |   |         | 
|                            | 2006                 |   | 2006                |   | 2005    | 
|                            | £m                   |   | £m                  |   | £m      | 
|                            |                      |   |                     |   |         | 
|Fixed
      rate:           |                      |   |                     |   |         | 
|                            |                      |   |                     |   |         | 
|Sterling                    | 2,540.0              |   | 2,580.8             |   | 1,827.2 | 
|United
      States dollars | 877.4                |   | 862.9               |   | 1,091.9 | 
|Euros                       | 1,492.1              |   | 1,476.6             |   | 1,480.0 | 
|Japanese
      yen          | 97.8                 | * | 108.6               | * | 120.7   | 
|Australian
      dollars    | 22.0                 |   | 22.0                |   | 22.6    | 
|                            |                      |   |                     |   |         | 
|Floating
      rate:        |                      |   |                     |   |         | 
|                            |                      |   |                     |   |         | 
|Sterling                    | 577.3                |   | 577.5               |   | 548.2   | 
|Japanese
      yen          |                     |   |                    |   | 12.3    | 
|United
      States dollars | 13.4                 |   | 13.4                |   | 13.8    | 
|Australian
      dollars    | 28.7                 |   | 28.7                |   | 29.4    | 
|Euros                       | 18.6                 |   | 18.6                |   | 22.7    | 
|Hong
      Kong dollars     | 11.1                 |   | 11.1                |   | 12.5    | 
|                            |                      |   |                     |   |         | 

|  |                                                                                                                                                                                                                                                                                              
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Included
      in the above table is a loan with Japanese yen principal paying a United
      States dollar coupon. Included in fixed rate borrowings are sterling denominated
      loans of £450.0 million for which the principal and interest are linked
      to the Retail Price Index.

The functional
  currency of the majority of group entities is sterling. Debt raised in currencies
  other than sterling is, in most cases, raised in a currency other than the functional
  currency of that entity.

The fair
  values of the groups financial instruments are shown on page 90.

Taking
  into account all derivative instruments, including those not designated as a
  hedge relationship, borrowings can be analysed as follows:

|         | Fixed
      rate borrowings |  |                     |  | Floating
      rate borrowings |  |          | 
|-------- | --------------------------- |  | ------------------- |  | ------------------------------ |  | -------- | 
|         |                             |  |                     |  |                                |  |          | 
|         |                             |  | Weighted            |  |                                |  |          | 
|         |                             |  | average             |  |                                |  | Weighted | 
|         | Weighted                    |  | period
      for    |  |                                |  | average  | 
|         | average                     |  | which
      rate is |  | At
      fixed                 |  | interest | 
|         | interest
      rates        |  | fixed               |  | interest
      rates           |  | rate     | 
|2006     | %                           |  | Years               |  | £m                             |  | %        | 
|         |                             |  |                     |  |                                |  |          | 
|Sterling | 5.58                        |  | 7.13                |  | 4,911.3                        |  | 5.01     | 
|Other    | 5.65                        |  | 3.32                |  | 91.7                           |  | 2.36     | 
|         |                             |  |                     |  |                                |  |          | 
|         |                             |  |                     |  | 5,003.0                        |  |          | 
|         |                             |  |                     |  |                                |  |          | 

|         |                             |  |                     |  |                                |  |          | 
|-------- | --------------------------- |  | ------------------- |  | ------------------------------ |  | -------- | 
|         | Fixed
      rate borrowings |  |                     |  | Floating
      rate borrowings |  |          | 
|         |                             |  |                     |  |                                |  |          | 
|         |                             |  | Weighted            |  |                                |  |          | 
|         |                             |  | average             |  |                                |  | Weighted | 
|         | Weighted                    |  | period
      for    |  |                                |  | average  | 
|         | average                     |  | which
      rate is |  | At
      fixed                 |  | interest | 
|         | interest
      rates        |  | fixed               |  | interest
      rates           |  | rate     | 
|2005     | %                           |  | Years               |  | £m                             |  | %        | 
|         |                             |  |                     |  |                                |  |          | 
|Sterling | 6.19                        |  | 5.52                |  | 4,507.4                        |  | 4.85     | 
|Other    | 6.35                        |  | 5.78                |  | 68.2                           |  | 2.37     | 
|         |                             |  |                     |  |                                |  |          | 
|         |                             |  |                     |  | 4,575.6                        |  |          | 
|         |                             |  |                     |  |                                |  |          | 

Debt items held at fair value through profit or loss:

|                                     |          |  |                       |   |                   |   | Movement
           in the year due to: |  
|------------------------------------ | -------- |  | --------------------- | - | ----------------- | - | --------------------------------------- | -
|                                     |          |  |                       |   |                   |   |                                         |  
|                                     |          |  |                       |   |                   |   | Total
      impact                      |  
|                                     | Carrying |  | Interest
      rates/ |   |                   |   | recognised
      in the                 |  
|                                     | value    |  | exchange
      rates  |   | Credit
      risk |   | income
      statement                  |  
|                                     | £m       |  | £m                    |   | £m                |   | £m                                      |  
|                                     |          |  |                       |   |                   |   |                                         |  
|£250m
      8.875% due March 2026    | 358.9    |  | (13.5                 | ) | (4.3              | ) | (17.8                                   | )
|US$400m
      6.875% due August 2028 | 240.1    |  | (11.7                 | ) | 1.3               |   | (10.4                                   | )
|JPY1bn
      due 2007                | 4.9      |  |                      |   |                  | * |                                        |  
|JPY3bn
      0.705% due 2008         | 14.7     |  | 0.2                   |   |                  | * | 0.2                                     |  
|JPY3bn
      1.135% due 2013         | 13.6     |  | 1.2                   |   |                  | * | 1.2                                     |  
|                                     |          |  |                       |   |                   |   |                                         |  

|  |                                                                                                                                                                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Due
      to the short duration of these bonds, the credit margin is very narrow and,
      due to the inactive market, difficult to estimate. Therefore, changes in
      value shown in the table are only from interest and exchange rate differences.



|United
          Utilities Annual Report & Accounts 2006 | 89
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| |                            | 
| | -------------------------- | 
| | Financial
      statements | 
| |                            | 

|                                                              
|--------------------------------------------------------------
|                                                              
|Notes
      to the consolidated financial statements continued
|                                                              



17
  Borrowingscontinued

Company
  Excluding
  amounts owed to subsidiary undertakings, the company has borrowings totalling
  £1,359.1 million (2005: £1,127.0 million), of which £478.2
  million falls due within one year, repayable within three months of 31 March
  2006 with interest for the short-term period based on fixed rates, the weighted
  average rate being 4.62 per cent, and after that based on floating rates. The
  remaining loans totalling £880.9 million have maturities and interest
  rates as follows:

£14.7
  million maturing in the year ending 31 March 2008 has interest charged at 0.705
  per cent; £304.5 million maturing in the year ending 31
  March 2009 has interest charged at 6.45 per cent on £291.7 million, at 4.21
  per cent on £7.0 million and at floating rates on the remaining £5.8
  million; £7.1 million maturing in the year ending 31 March 2010 has interest
  charged at floating rates.

Of the
  remaining monies falling due after five years, £126.2 million matures
  in 2018 with interest being charged at 4.55 per cent, £190.4 million matures
  in 2019 with interest charged at 5.375 per cent and £238.0 million with
  interest charged at 6.875 per cent matures in 2028.

As at
  31 March 2005 the company had borrowings, excluding amounts owed to subsidiary
  undertakings, totalling £1,127.0 million of which £212.1 million
  fell due within one year, repayable in August 2005 with interest charged at
  6.25 per cent. The remaining loans totalling £914.9 million had maturities
  and interest rates as follows:

£16.5
  million maturing in February 2008 had interest charged at 0.705 per cent; £311.6
  million maturing in the year ending 2009 had interest charged at 6.45 per cent
  on £298.5 million, at 4.21 per cent on £6.9 million and at floating
  rates on the remaining £6.2 million; £5.7 million maturing in the
  year ending 2010 had interest charged at 3.875 per cent; £338.7 million
  maturing in the year ending 2019 had interest rates of 5.375 per cent on £189.9
  million and 4.55 per cent on £148.8 million; £242.4 million was
  repayable in the year ending 2029 with interest charged at 6.875 per cent.

18
  Financial instruments

|Group                                  |          |   | 2006     |   |          |   | 2005     |  
|-------------------------------------- | -------- | - | -------- | - | -------- | - | -------- | -
|                                       |          |   |          |   |          |   |          |  
|                                       | Carrying |   | Fair     |   | Carrying |   | Fair     |  
|                                       | value    |   | value    |   | Value    |   | value    |  
|At
      31 March 2006                 | £m       |   | £m       |   | £m       |   | £m       |  
|                                       |          |   |          |   |          |   |          |  
|Financial
      assets                 |          |   |          |   |          |   |          |  
|Non-current
      assets               |          |   |          |   |          |   |          |  
|Derivative
      financial instruments | 40.8     |   | 40.8     |   |         |   |         |  
|                                       |          |   |          |   |          |   |          |  
|Current
      assets                   |          |   |          |   |          |   |          |  
|Cash
      and cash equivalents        | 1,443.9  |   | 1,443.9  |   | 865.6    |   | 865.6    |  
|Derivative
      financial instruments | 48.9     |   | 48.9     |   |         |   |         |  
|                                       |          |   |          |   |          |   |          |  
|Financial
      liabilities            |          |   |          |   |          |   |          |  
|Non-current
      liabilities          |          |   |          |   |          |   |          |  
|Borrowings                             | (5,081.1 | ) | (5,289.1 | ) | (4,669.0 | ) | (4,788.1 | )
|Derivative
      financial instruments | (57.6    | ) | (57.6    | ) |         |   |         |  
|                                       |          |   |          |   |          |   |          |  
|Current
      liabilities              |          |   |          |   |          |   |          |  
|Borrowings                             | (619.1   | ) | (619.1   | ) | (512.3   | ) | (512.3   | )
|Derivative
      financial instruments | (76.4    | ) | (76.4    | ) |         |   | (118.9   | )
|                                       |          |   |          |   |          |   |          |  

Financial
  instruments and risk management The primary
  financial risks faced by the group are interest rate risk and exchange rate
  risk.

The board
  has reviewed and agreed policies for managing each of these risks, as summarised
  below. The board has also approved all of the classes of financial instruments
  used by the group. The groups treasury function, which is authorised to
  conduct the day-to-day treasury activities of the group, reports at least annually
  to the board. The use of financial derivatives is governed by the groups
  policies approved by the board, which provide written principles on the use
  of financial derivatives.

All of
  the groups activities involve analysis, acceptance and management of some
  degree of risk or combination of risks. The most important types of financial
  risk are credit risk, liquidity risk and market risk. Market risk includes foreign
  exchange, interest rate and equity price risks.

The groups
  risk management policies are designed to identify and analyse these risks, to
  set appropriate risk limits and controls and to monitor the risks and limits
  continually by means of reliable and up-to-date systems. The group modifies
  and enhances its risk management policies and systems to reflect changes in
  markets and products. The Audit Committee, under authority delegated by the
  board, formulates high level group risk management policy, monitors risk and
  receives reports that allow it to review the effectiveness of the groups
  risk management policies.

Credit
  risk management Credit
  risk is the risk that financial loss arises from the failure of a customer or
  counterparty to meet its obligations under a contract. It arises principally
  from lending, trade finance, treasury and leasing activities. The group has
  dedicated standards, policies and procedures to control and monitor all such
  risks.

Liquidity
  management The group
  maintains a strong liquidity position and manages the liquidity profile of its
  assets, liabilities and commitments so that cashflows are appropriately balanced
  and all funding obligations are met when due.



|90 | United Utilities Annual Report & Accounts 2006
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| |  |                             
| |  | ----------------------------
| |  | Financial
        statements
| |  |                             
| |  |                             

| |  |  | 
| |  |  | 
| |  |  | 
| |  |  | 



18 Financial instrumentscontinued

Market risk managementMarket
  risk is the risk that movements in market rates, including foreign exchange
  rates, interest rates, equity and commodity prices will reduce the groups
  income on the value of its portfolios. The management of market risk is undertaken
  using risk limits approved by the finance director under delegated authority.

The group uses a variety of financial instruments, including derivatives, when
raising finance for its operations in order to manage any exposure arising from
funding activity.

The groups activities expose it to the financial risks of changes in foreign
currency exchange rates and interest rates. The group uses foreign currency swap
contracts, interest rate swap contracts and financial futures to hedge these
exposures. The group does not use derivative financial instruments for speculative
purposes.

The counterparties to derivative instruments consist of financial institutions
and other bodies with good credit ratings. Although the group is potentially
exposed to credit loss in the event of non-performance by counterparties, such
credit risk is controlled through credit rating reviews of the counterparties
and by limiting the total amount of exposure to any one party. The group does
not believe it is exposed to any
material concentrations of credit risk.

The group borrows in the major global debt markets in a range of currencies at
both fixed and floating rates of interest, using derivatives, where appropriate,
to generate the
desired effective currency profile and interest basis.

Under an interest rate swap, the group agrees with another party to exchange
at specific intervals the difference between fixed rate and floating rate interest
amounts calculated by reference to an agreed notional principal amount. The notional
principal of these instruments reflects the extent of the groups involvement
in the instruments, but does not represent its exposure to credit risk, which
is assessed by
reference to the fair value.

Under a currency swap, the group agrees with another party to exchange the principal
amount of two currencies, together with interest amounts in the two currencies
agreed by reference to a specific interest rate basis and the principal amount.
The principal of these instruments reflects the extent of the groups involvement
in the instruments, but does not represent its exposure to credit risk, which
is assessed by
reference to the fair value.

As noted above, the group uses derivatives to manage its exposure to currency
risk on its borrowings. Subsidiary undertakings make no significant sales or
purchases in currencies other than their functional currencies. Accordingly,
the group has no material unhedged foreign currency exposures.

Financial instruments utilised by the group can be summarised as follows:

Interest
rate swapsInterest
rate swaps are used solely to manage floating rate borrowings in order to reduce
the financial risk to the group from potential future changes in medium-term
interest
rates.

Financial futuresFinancial
futures are used to manage the groups exposure to possible future changes
in short-term interest rates.

Forward
contractsThe
group generally hedges foreign exchange transaction exposures up to one year
forward. Hedges are put in place using forward contracts at the time that the
forecast exposure
becomes reasonably certain.

Currency
swapsThe
group uses currency swaps to hedge currency exposure where debt is raised in
one currency to fund in a different currency.

Fair
values of financial instrumentsThe
fair value of derivative instruments has been calculated by discounting the future
cashflows of the individual contracts using the appropriate market interest rate
and currency rates. Where interpolation occurs at points along the curve this
can significantly affect the value given to these instruments. As such, changes
in the frequency of points taken along the curve can affect the value of these
instruments. In addition, any changes in the assumed rates input to these models
could give rise to significant changes in value. The fair values of currency
and interest rate swaps exclude the related accrued interest receivables and
payables which are shown in the balance sheet separately within trade and other
payables and receivables.

Fair values have been estimated using the following methods and assumptions:

Non-current investmentsThe
fair value of investments, for which there are no quoted market prices, approximates
to their carrying value. The groups long-term investments are detailed
in note 13. The
carrying value of the groups unlisted investments is £86.8 million
(2005: £0.8 million). The carrying value of the groups listed investments
in THUS Group plc and Manila Water Company Inc is £83.9 million (2005: £8.9
million, Manila Water Company Inc only). The investment in THUS Group plc is
accounted for as an associate. The investment in Manila Water Company Inc is
valued based on published share prices, which is considered to be the
fair value.

Current assets and liabilitiesFinancial
instruments included within current assets and liabilities (excluding cash and
borrowings) are generally short-term in nature and accordingly their fair values
approximate to their book values.

Borrowings
  and non-equity interests (excluding foreign exchange contracts)The
  carrying values of cash and short-term borrowings and current asset investments
  approximate to their fair values because of the short-term maturity of these
  instruments. The fair value of long-term borrowings is estimated by discounting
  the future cashflows to net present values using appropriate market interest
  rates prevailing at the year end.



|United
          Utilities Annual Report & Accounts 2006 | 91
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| |                      | 
| | -------------------- | 
| | Financial statements | 
| |                      | 

|                                                             |  |  | 
|------------------------------------------------------------ |  |  | 
|                                                             |  |  | 
|Notes
    to the consolidated financial statements continued |  |  | 
|                                                             |  |  | 



18
  Financial instrumentscontinued

Currency and interest rate swapsThe group enters into currency and interest rate swaps in order to manage its foreign currency and interest rate exposures.

The analysis in the table below illustrates the sensitivity of the market value
of the groups financial instruments to changes in interest rates. The analysis
assumes an instantaneous 1.0 per cent (100 basis points) move in interest rates
for all maturities and currencies from their levels at 31 March 2006 with all
other variables held constant.

|                             |               |   | Market value change |  
|---------------------------- | ------------- | - | ------------------- | -
|                             |               |   |                     |  
|                             | Market value  |   | +1% movement        |  
|                             | 31 March 2006 |   | in interest rate    |  
|Interest rate movement       | £m            |   | £m                  |  
|                             |               |   |                     |  
|Long-term debt               | (5,289.1      | ) | 184.8               |  
|                             |               |   |                     |  
|Derivatives                  | (44.3         | ) | (67.3               | )
|                             |               |   |                     |  
|Cash and short-term deposits | 1,513.5       |   | (0.6                | )
|                             |               |   |                     |  
|

HedgesAchieving
  hedge
accounting under IAS 39 Financial Instruments: Recognition and Measurement is
based on measuring the effectiveness of the derivative as a hedge instrument
as well as fulfilling hedge documentation rules. The effectiveness test compares
the change in fair value of the designated derivative and the change in fair
value of the hedged item to determine if this ratio falls within the permitted
range of 80 per cent to 125 per cent. Any derivative that falls outside the permitted
range is classified as held for trading. Gains or losses on the derivative are
recognised immediately in the income statement except where the derivative is
designated within an effective cashflow hedge relationship, in which case the
gains and losses are deferred in equity and are recycled through the income statement
at the time the hedged item is recognised in the income statement. Where a derivative
does fall within the permitted range but is not 100 per cent effective, the ineffective
element is recognised in the income statement immediately. Those derivative instruments
that are not designated in a hedging relationship are classified as held for
trading.

Where fair value hedges occur, shown in the table below, these hedges are managing
interest rate risk and/or currency risk in relation to financing.

The cashflow hedges detailed in the table relate to the management of cashflow
on a particular floating rate loan over the regulatory period to 2010. The group
largely manages all its financing cashflows over the observed five-year regulatory
period; however, the majority of these hedges did not qualify for hedge accounting
as they would be overlaid onto transactions which are already within fair value
hedge
relationships.

The group has no regular way transactions, and has not pledged collateral in
relation to any of its derivative instruments.

The fair value of the derivative financial instruments as at 31 March 2006 was
as follows:

|                                        | Assets           |  | Liabilities      |  
|--------------------------------------- | ---------------- |  | ---------------- | -
|                                        | fair
      value |  | fair
      value |  
|                                        | £m               |  | £m               |  
|                                        |                  |  |                  |  
|Non-current                             |                  |  |                  |  
|Fair
      value hedge derivatives      | 27.6             |  | (57.7            | )
|Option
      over THUS Group plc shares | 13.2             |  |                 |  
|                                        |                  |  |                  |  
|                                        | 40.8             |  | (57.7            | )
|                                        |                  |  |                  |  
|Current                                 |                  |  |                  |  
|Held
      for trading derivatives      | 48.9             |  | (76.4            | )
|                                        |                  |  |                  |  

Included
    in the above table is a liability relating to a cashflow hedge, the notional
    and fair value of which is inconsequential. Within the year ended 31 March
    2006, a movement in the fair value of the derivative of £0.7 million
    was recognised and taken to reserves.

The notional value of the financial instruments as at 31 March 2006 was as follows:

|                            | Cash        |  | Cash        |   |                  |  |                        |   |           |  
|--------------------------- | ----------- |  | ----------- | - | ---------------- |  | ---------------------- | - | --------- | -
|                            | instruments |  | instruments |   | Derivative       |  | Derivative             |   |           |  
|                            | assets      |  | liabilities |   | asset
      legs |  | liabilities
      legs |   | Total     |  
|                            | millions    |  | millions    |   | millions         |  | millions               |   | millions  |  
|                            |             |  |             |   |                  |  |                        |   |           |  
|Japanese
      yen          | 100,000.0   |  | (20,000.0   | ) | 20,000.0         |  | (142,857.0             | ) | (42,857.0 | )
|Sterling                    | 898.1       |  | (2,704.0    | ) | 5,390.0          |  | (7,167.0               | ) | (3,582.9  | )
|Euros                       |            |  | (2,130.0    | ) | 2,120.0          |  | 8.0                    |   | (2.0      | )
|United
      States dollars |            |  | (1,545.0    | ) | 1,545.0          |  |                       |   |          |  
|Hong
      Kong dollars     |            |  | (150.0      | ) | 150.0            |  |                       |   |          |  
|                            |             |  |             |   |                  |  |                        |   |           |  

For the
  year ended 31 March 2005 the following disclosures are relevant as required
  by FRS13 Derivatives
and other financial instruments: Disclosure:

The carrying value of debt is shown in the balance sheet at the hedged rate.
The impact of using the hedged currency rates as opposed to translation at year
end exchange rates
is £(68.1) million.

Unrecognised gains and losses on financial assets and liabilities for which hedge
accounting has
been used at the balance sheet date are £152.4 million and £207.9
million respectively.

As
  at 31 March 2005 the group anticipated that £83.5 million of these gains
  and £72.2 million of these losses would have been realised in the year
  ended 31 March 2006. Of the unrecognised gains and losses on hedges as at 1
  April 2004 the net gain recognised in the profit and loss account for the year
  ended 31 March 2005 was £40.2 million.



|92 | United
        Utilities Annual Report & Accounts 2006
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| |  |                             
| |  | ----------------------------
| |  | Financial
        statements
| |  |                             
| |  |                             

| |  |  | 
| |  |  | 
| |  |  | 
| |  |  | 



19Retirement
  benefit obligations

The
    group participates in a number of pension schemes principally in the UK.
    The major schemes are funded defined benefit schemes  the United Utilities
    Pension Scheme (UUPS) and the United Utilities Group of the Electricity Supply
    Pension Scheme (ESPS) (the Schemes), of which the ESPS is closed
    to new employees. UUPS also includes a defined contribution section which
    constitutes less than 0.5 per cent of the total asset value. The assets of
    these Schemes are held in trust funds independent of group finances.

The last actuarial valuations of the Schemes were carried out as at 31 March
2004. These valuations have been updated to take account of the requirements
of IAS 19 Employee
Benefits in order to assess the position at 31 March 2006 by projecting
forward from 31 March 2004, and have been performed by an independent actuary,
Mercer Human Resource Consulting.

The company did not make any contribution to the Schemes for the year ended 31
March 2006 and does not expect to make any contribution over the year to 31 March
2007. By exception, the company contributes to its defined contribution plan
section of the Essex County Council Pension Fund and unapproved promises, for
which contributions are expected to be largely level with the current year.

On 31 March 2005,
the group made lump sum payments of £216.0 million and £103.5 million
to UUPS and ESPS respectively. The payments were in lieu of the estimated company
contributions that would have been payable for defined benefit members over the
five years from 1 April 2005. Subject to the results of the actuarial valuations
at 31 March 2007, company contributions will resume from 1 April 2010. In the
meantime, the group will continue to pay contributions in respect of the defined
contribution members and insurance premiums. Other payments will be made by the
group in accordance with the funding agreement between the Trustee and the group.

The group also operates a series of unfunded, unapproved retirement benefit schemes.
The cost of the unfunded, unapproved retirement benefit schemes is included in
the total pension cost, on a basis consistent with IAS 19 and the assumptions
set out below. In accordance with these unfunded arrangements, the group has
made payments to
former directors, including lump sum payments, of £2.8 million in total
in the
year ended 31 March 2006 (2005: £370,510).

The total defined
benefit pension cost for the period was £19.4 million (2005: £61.9
million), of which £3.6 million is included within restructuring costs,
(2005: £14.9 million) in respect of pension severance benefits. A pension
surplus of £19.3 million is included in the balance sheet at 31 March 2006
(2005: obligation of £84.6 million). Information about the pension arrangements
for executive directors is contained in the directors remuneration report.

The main
financial assumptions used by the actuary were as follows:

|                                       | Group
      and Company |  
|-------------------------------------- | ----------------------- | -
|                                       |                         |  
|                                       | At
      31 March       |  
|                                       | 2006                    |  
|                                       |                         |  
|Discount
      rate                    | 4.90                    | %
|Expected
      return on assets        | 6.10                    | %
|Pensionable
      salary growth  UUPS | 3.75                    | %
|Pensionable
      salary growth  ESPS | 3.80                    | %
|Pension
      increases                | 2.80                    | %
|Price
      inflation                  | 2.80                    | %
|                                       |                         |  

As at 31 March 2006, the fair value of plan assets, together with the liabilities in the plans recognised in the balance sheet were as follows:

|                                            | Group 2006  |  | Group 2005 |   | Company 2006 |  | Company 2005 |  
|------------------------------------------- | ----------- |  | ---------- | - | ------------ |  | ------------ | -
|                                            |             |  |            |   |              |  |              |  
|                                            | Plan assets |  | Value      |   | Plan assets  |  | Value        |  
|                                            | %           |  | £m         |   | %            |  | £m           |  
|                                            |             |  |            |   |              |  |              |  
|Equities                                    | 66.6        |  | 1,825.1    |   | 63.7         |  | 1,463.6      |  
|Gilts                                       | 22.3        |  | 611.1      |   | 18.6         |  | 427.4        |  
|Bonds                                       | 11.0        |  | 301.4      |   | 14.9         |  | 342.4        |  
|Property                                    | 0.1         |  | 2.7        |   | 0.1          |  | 2.3          |  
|Cash                                        |            |  |           |   | 2.7          |  | 62.0         |  
|                                            |             |  |            |   |              |  |              |  
|Total fair value of assets                  | 100.0       |  | 2,740.3    |   | 100.0        |  | 2,297.7      |  
|                                            |             |  |            |   |              |  |              |  
|Present value of liabilities                |             |  | (2,721.0   | ) |              |  | (2,382.3     | )
|                                            |             |  |            |   |              |  |              |  
|Net retirement benefit surplus/(obligation) |             |  | 19.3       |   |              |  | (84.6        | )
|                                            |             |  |            |   |              |  |              |  

To develop
  the expected long-term rate of return on assets assumption, the company considered
  the level of expected returns on risk-free investments, the historic level of
  the risk premium associated with the other asset class in which the portfolio
  is invested and the expectations for future returns of each asset class. The
  expected return for each asset class was then weighted based on the actual asset
  allocation to develop the expected long-term return on assets assumption for
  the portfolio. The actual return on plan assets was £547.9 million (2005:
  £169.4 million).



|United
          Utilities Annual Report & Accounts 2006 | 93
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| |                          | 
| | ------------------------ | 
| | Financial
    statements | 
| |                          | 

|                                                            
|------------------------------------------------------------
|                                                            
|Notes
    to the consolidated financial statements continued
|                                                            



19 Retirement benefit obligationscontinued

Movements in the present value of the defined benefit obligations are as follows:

|                                         |  | Group    |   | Company  |  
|---------------------------------------- |  | -------- | - | -------- | -
|                                         |  |          |   |          |  
|                                         |  | 2006     |   | 2005     |  
|                                         |  | £m       |   | £m       |  
|                                         |  |          |   |          |  
|At 1 April                               |  | (2,382.3 | ) | (2,227.0 | )
|Current service cost                     |  | (53.5    | ) | (57.4    | )
|Interest
       cost on plan obligations |  | (130.4   | ) | (120.9   | )
|Member contributions                     |  | (14.5    | ) | (15.2    | )
|Past
    service cost                    |  | (5.1     | ) | (15.5    | )
|Actuarial losses                         |  | (301.1   | ) | (55.4    | )
|Curtailments/settlements                 |  | 62.6     |   | 27.8     |  
|Benefits paid                            |  | 103.3    |   | 81.3     |  
|                                         |  |          |   |          |  
|At 31 March                              |  | (2,721.0 | ) | (2,382.3 | )
|                                         |  |          |   |          |  

At 31 March 2006, £12.8 million (2005: £13.2 million) of the defined
benefit obligation relates to unfunded benefit plans.

Movements in the fair value of plan assets were as follows:

|                               |  | Group   |   | Company |  
|------------------------------ |  | ------- | - | ------- | -
|                               |  |         |   |         |  
|                               |  | 2006    |   | 2005    |  
|                               |  | £m      |   | £m      |  
|                               |  |         |   |         |  
|At 1 April                     |  | 2,297.7 |   | 1,845.7 |  
|Expected return on plan assets |  | 150.7   |   | 124.1   |  
|Actuarial gains                |  | 420.3   |   | 45.3    |  
|Curtailments/settlements       |  | (43.7   | ) | (20.0   | )
|Company contributions          |  | 4.1     |   | 368.7   |  
|Member contributions           |  | 14.5    |   | 15.2    |  
|Benefits paid                  |  | (103.3  | ) | (81.3   | )
|                               |  |         |   |         |  
|At 31 March                    |  | 2,740.3 |   | 2,297.7 |  
|                               |  |         |   |         |  

The net pension expense before taxation recognised in the income statement in
respect of the defined benefit schemes is summarised as follows:

|                                                                |  | Group  |   | Company |  
|--------------------------------------------------------------- |  | ------ | - | ------- | -
|                                                                |  |        |   |         |  
|                                                                |  | 2006   |   | 2005    |  
|                                                                |  | £m     |   | £m      |  
|                                                                |  |        |   |         |  
|Current service cost                                            |  | (53.5  | ) | (57.4   | )
|Curtailments/settlements                                        |  | 18.9   |   | 7.8     |  
|Past service cost                                               |  | (1.5   | ) | (0.6    | )
|Past
    service cost  restructuring costs (see notes 1 and 2) |  | (3.6   | ) | (14.9   | )
|Expected return on plan assets                                  |  | 150.7  |   | 124.1   |  
|Interest
       cost on plan obligations                        |  | (130.4 | ) | (120.9  | )
|                                                                |  |        |   |         |  
|Net pension expense before taxation                             |  | (19.4  | ) | (61.9   | )
|                                                                |  |        |   |         |  

The
    above amounts are all recognised in arriving at operating profit from continuing
    operations,
except for a settlement credit of £8.3 million (2005: £nil), current
service cost of £2.2 million (2005: £nil), past service cost of £nil
(2005: £0.1 million) and an expected return on plan assets of £0.7
million (2005: £nil) which are recognised within the discontinued operation
line of the groups income statement.

The reconciliation of the opening and closing balance sheet position is as follows:

|                                                         |  |       |   | Group  |   |      |   | Company |  
|-------------------------------------------------------- |  | ----- | - | ------ | - | ---- | - | ------- | -
|                                                         |  |       |   |        |   |      |   |         |  
|                                                         |  | 2006  |   | 2005   |   | 2006 |   | 2005    |  
|                                                         |  | £m    |   | £m     |   | £m   |   | £m      |  
|                                                         |  |       |   |        |   |      |   |         |  
|At 1 April                                               |  | (84.6 | ) | (381.3 | ) | (8.2 | ) | (15.6   | )
|Expenses recognised in the consolidated income statement |  | (19.4 | ) | (61.9  | ) | (1.1 | ) | (1.6    | )
|Contributions paid                                       |  | 4.1   |   | 368.7  |   | 2.9  |   | 9.8     |  
|Actuarial gains/(losses) gross of taxation               |  | 119.2 |   | (10.1  | ) | 5.2  |   | (0.8    | )
|                                                         |  |       |   |        |   |      |   |         |  
|                                                         |  | 19.3  |   | (84.6  | ) | (1.2 | ) | (8.2    | )
|                                                         |  |       |   |        |   |      |   |         |  

Actuarial gains and losses are recognised directly in the statement of recognised
income and
expense. At 31 March 2006, a cumulative gain of £109.1 million (2005: loss £10.1
million) was recorded directly in the statement of recognised income
and expense.



|94 | United
        Utilities Annual Report & Accounts 2006
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| |  |                         
| |  | ------------------------
| |  | Financial
    statements
| |  |                         

|
|
|
|
|



19 Retirement benefit obligationscontinued

The history of the plan for the current and prior period is as follows:

|                                               |  | Group
    and Company | 
|---------------------------------------------- |  | --------------------- | 
|                                               |  |                       | 
|                                               |  | 2006                  | 
|                                               |  | £m                    | 
|                                               |  |                       | 
|Experience
    adjustments on plan obligations |  |                      | 
|Experience adjustments on plan assets          |  | 397.2                 | 
|                                               |  |                       | 

During the year,
the group made £10.8 million (2005: £3.3 million) of contributions
to defined contribution schemes, included in arriving at operating profit.

20 Deferred tax

The following are the major deferred tax liabilities and assets recognised by
the group, and the movements thereon, during the current and prior reporting
periods.

|                                                       |  | Accelerated            |  | Retirement                |   |       |   | Group   |   | Company |  
|------------------------------------------------------ |  | ---------------------- |  | ------------------------- | - | ----- | - | ------- | - | ------- | -
|                                                       |  | tax
      depreciation |  | benefit
      obligations |   | Other |   | Total   |   | Total   |  
|                                                       |  | £m                     |  | £m                        |   | £m    |   | £m      |   | £m      |  
|                                                       |  |                        |  |                           |   |       |   |         |   |         |  
|At
      1 April 2004                                  |  | 1,333.9                |  | (140.2                    | ) | 24.3  |   | 1,218.0 |   | 2.1     |  
|Charge/(credit)
      to income statement for the year |  | 126.1                  |  | 1.3                       |   | (1.7  | ) | 125.7   |   | 1.0     |  
|Credit
      to equity for the year                    |  |                       |  | (3.0                      | ) | (3.4  | ) | (6.4    | ) |        |  
|                                                       |  |                        |  |                           |   |       |   |         |   |         |  
|At
      31 March 2005                                 |  | 1,460.0                |  | (141.9                    | ) | 19.2  |   | 1,337.3 |   | 3.1     |  
|Charge/(credit)
      to income statement for the year |  | 96.8                   |  |                          |   | (52.1 | ) | 44.7    |   | (10.3   | )
|Charge/(credit)
      to equity for the year           |  |                       |  | 35.8                      |   | 0.8   |   | 36.6    |   | (0.2    | )
|Acquired
      in year                                 |  | 8.0                    |  |                          |   |      |   | 8.0     |   |        |  
|                                                       |  |                        |  |                           |   |       |   |         |   |         |  
|At
      31 March 2006                                 |  | 1,564.8                |  | (106.1                    | ) | (32.1 | ) | 1,426.6 |   | (7.4    | )
|                                                       |  |                        |  |                           |   |       |   |         |   |         |  

Certain deferred tax assets and liabilities have been offset in accordance with
IAS 12 Income Taxes.

21 Provisions

|                            |  |               |   |                |   |       |   | Group |   | Company       |  
|--------------------------- |  | ------------- | - | -------------- | - | ----- | - | ----- | - | ------------- | -
|                            |  |               |   |                |   |       |   |       |   |               |  
|                            |  | Restructuring |   | Onerous leases |   | Other |   | Total |   | Restructuring |  
|                            |  | £m            |   | £m             |   | £m    |   | £m    |   | £m            |  
|                            |  |               |   |                |   |       |   |       |   |               |  
|At 1 April 2004             |  | 5.9           |   |               |   | 3.2   |   | 9.1   |   |              |  
|Charged to income statement |  | 29.7          |   |               |   | 1.1   |   | 30.8  |   | 0.4           |  
|Utilised in year            |  | (20.4         | ) |               |   | (1.1  | ) | (21.5 | ) |              |  
|                            |  |               |   |                |   |       |   |       |   |               |  
|At 31 March 2005            |  | 15.2          |   |               |   | 3.2   |   | 18.4  |   | 0.4           |  
|Charged to income statement |  | 25.5          |   |               |   | 3.2   |   | 28.7  |   |              |  
|Acquired in the year        |  | 2.3           |   | 13.6           |   | 23.9  |   | 39.8  |   |              |  
|Utilised in year            |  | (24.6         | ) | (1.6           | ) | (7.6  | ) | (33.8 | ) | (0.4          | )
|                            |  |               |   |                |   |       |   |       |   |               |  
|At
    31 March 2006        |  | 18.4          |   | 12.0           |   | 22.7  |   | 53.1  |   |              |  
|                            |  |               |   |                |   |       |   |       |   |               |  

The restructuring provision principally relates to severance and programme costs
in the business
process outsourcing segment and represents managements best estimate of
the
groups liability.

The onerous leases provision principally relates to surplus property leases
following the acquisition and subsequent restructure of Vertex Financial Services
Holdings Limited
(note 24).

Provisions have been analysed between current and non-current as follows:

|                     |  |               |  |                    |  |       |  | Group |  | Company       | 
|-------------------- |  | ------------- |  | ------------------ |  | ----- |  | ----- |  | ------------- | 
|                     |  |               |  |                    |  |       |  |       |  |               | 
|                     |  | Restructuring |  | Onerous
    leases |  | Other |  | Total |  | Restructuring | 
|                     |  | £m            |  | £m                 |  | £m    |  | £m    |  | £m            | 
|                     |  |               |  |                    |  |       |  |       |  |               | 
|At
    31 March 2006 |  |               |  |                    |  |       |  |       |  |               | 
|Non-current          |  |              |  | 9.3                |  | 7.3   |  | 16.6  |  |              | 
|Current              |  | 18.4          |  | 2.7                |  | 15.4  |  | 36.5  |  |              | 
|                     |  |               |  |                    |  |       |  |       |  |               | 
|                     |  | 18.4          |  | 12.0               |  | 22.7  |  | 53.1  |  |              | 
|                     |  |               |  |                    |  |       |  |       |  |               | 
|                     |  |               |  |                    |  |       |  |       |  |               | 
|At
    31 March 2005 |  |               |  |                    |  |       |  |       |  |               | 
|Current              |  | 15.2          |  |                   |  | 3.2   |  | 18.4  |  | 0.4           | 
|                     |  |               |  |                    |  |       |  |       |  |               | 



|United
          Utilities Annual Report & Accounts 2006 | 95
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| |                              | 
| | ---------------------------- | 
| | Financial
        statements | 
| |                              | 

|                                                                
|----------------------------------------------------------------
|                                                                
|Notes
        to the consolidated financial statements continued
|                                                                



22 Trade and other payables

|                                        |  |       |  | Group |  |       |  | Company | 
|--------------------------------------- |  | ----- |  | ----- |  | ----- |  | ------- | 
|                                        |  |       |  |       |  |       |  |         | 
|                                        |  | 2006  |  | 2005  |  | 2006  |  | 2005    | 
|Non-current                             |  | £m    |  | £m    |  | £m    |  | £m      | 
|                                        |  |       |  |       |  |       |  |         | 
|Deferred grants and contributions       |  | 347.3 |  | 313.4 |  |      |  |        | 
|Other creditors                         |  | 36.4  |  | 23.9  |  |      |  |        | 
|                                        |  |       |  |       |  |       |  |         | 
|                                        |  | 383.7 |  | 337.3 |  |      |  |        | 
|                                        |  |       |  |       |  |       |  |         | 
|                                        |  |       |  |       |  |       |  |         | 
|                                        |  |       |  | Group |  |       |  | Company | 
|                                        |  |       |  |       |  |       |  |         | 
|                                        |  | 2006  |  | 2005  |  | 2006  |  | 2005    | 
|Current                                 |  | £m    |  | £m    |  | £m    |  | £m      | 
|                                        |  |       |  |       |  |       |  |         | 
|Trade payables                          |  | 87.9  |  | 71.0  |  |      |  |        | 
|Amounts owed to subsidiary undertakings |  |      |  |      |  | 512.5 |  | 496.2   | 
|Amounts owed to related parties         |  | 1.5   |  |      |  |      |  |        | 
|Other tax and social security           |  | 11.5  |  | 11.3  |  |      |  | 0.4     | 
|Other creditors                         |  | 2.0   |  | 1.6   |  | 1.0   |  |        | 
|Accruals and deferred income            |  | 752.2 |  | 866.1 |  | 37.3  |  | 33.9    | 
|                                        |  |       |  |       |  |       |  |         | 
|                                        |  | 855.1 |  | 950.0 |  | 550.8 |  | 530.5   | 
|                                        |  |       |  |       |  |       |  |         | 

Trade and other payables comprises amounts outstanding for trade purchases and
ongoing costs. The average credit period taken for trade purchases is 45 days
for the group (2005: 54
days) and for the company 37 days (2005: 34 days).

The directors consider that the carrying amount of trade payables approximates
to their fair value.

Deferred
grants and contributions

|                                             |  | 2006  |   | 2005  |  
|-------------------------------------------- |  | ----- | - | ----- | -
|                                             |  | £m    |   | £m    |  
|                                             |  |       |   |       |  
|At 1 April                                   |  | 313.4 |   | 298.1 |  
|Received in the year                         |  | 45.5  |   | 25.8  |  
|Disposed of in the year                      |  | (0.2  | ) |      |  
|Released to the income statement in the year |  | (11.4 | ) | (10.5 | )
|                                             |  |       |   |       |  
|At 31 March                                  |  | 347.3 |   | 313.4 |  
|                                             |  |       |   |       |  
|                                             |  |       |   |       |  

23
Shareholders equity

|                                                                             |  |         |  | Share   |  |             |  |          |   | Cumulative |   |          |   |         |  
|---------------------------------------------------------------------------- |  | ------- |  | ------- |  | ----------- |  | -------- | - | ---------- | - | -------- | - | ------- | -
|                                                                             |  | Share   |  | premium |  | Revaluation |  | Treasury |   | exchange   |   | Retained |   |         |  
|                                                                             |  | capital |  | account |  | reserve     |  | shares   |   | reserve    |   | earnings |   | Total   |  
|Group                                                                        |  | £m      |  | £m      |  | £m          |  | £m       |   | £m         |   | £m       |   | £m      |  
|                                                                             |  |         |  |         |  |             |  |          |   |            |   |          |   |         |  
|At
      1 April 2004                                                        |  | 711.8   |  | 1,023.1 |  | 158.8       |  | (2.3     | ) |           |   | 287.9    |   | 2,179.3 |  
|Profit
      for year                                                        |  |         |  |         |  |             |  |         |   |           |   | 260.3    |   | 260.3   |  
|Dividends                                                                    |  |        |  |        |  |            |  |         |   |           |   | (318.0   | ) | (318.0  | )
|New
      share capital issued                                               |  | 4.4     |  | 15.6    |  |            |  |         |   |           |   |         |   | 20.0    |  
|Shares
      disposed of from employee share trust                           |  |        |  |        |  |            |  | 2.0      |   |           |   |         |   | 2.0     |  
|Post
      employment benefits  actuarial losses on defined benefit schemes |  |        |  |        |  |            |  |         |   |           |   | (7.1     | ) | (7.1    | )
|Share-based
      compensation  charged to income statement                 |  |        |  |        |  |            |  |         |   |           |   | 4.7      |   | 4.7     |  
|Exercise
      of share options                                              |  |        |  |        |  |            |  |         |   |           |   | (1.8     | ) | (1.8    | )
|Exchange
      adjustments                                                   |  |        |  |        |  |            |  |         |   | 3.7        |   |         |   | 3.7     |  
|                                                                             |  |         |  |         |  |             |  |          |   |            |   |          |   |         |  
|At
      31 March 2005                                                       |  | 716.2   |  | 1,038.7 |  | 158.8       |  | (0.3     | ) | 3.7        |   | 226.0    |   | 2,143.1 |  
|Adoption
      of IAS 32 and IAS 39                                          |  |        |  |        |  |            |  |         |   |           |   | (3.5     | ) | (3.5    | )
|                                                                             |  |         |  |         |  |             |  |          |   |            |   |          |   |         |  
|At
      1 April 2005                                                        |  | 716.2   |  | 1,038.7 |  | 158.8       |  | (0.3     | ) | 3.7        |   | 222.5    |   | 2,139.6 |  
|Profit
      for year                                                        |  |        |  |        |  |            |  |         |   |           |   | 207.9    |   | 207.9   |  
|Dividends                                                                    |  |        |  |        |  |            |  |         |   |           |   | (344.2   | ) | (344.2  | )
|New
      share capital issued                                               |  | 159.2   |  | 369.1   |  |            |  |         |   |           |   |         |   | 528.3   |  
|Post
      employment benefits  actuarial gains on defined benefit schemes  |  |        |  |        |  |            |  |         |   |           |   | 83.4     |   | 83.4    |  
|Share-based
      compensation  charged to income statement                 |  |        |  |        |  |            |  |         |   |           |   | 2.3      |   | 2.3     |  
|Revaluation
      of investments                                             |  |        |  |        |  |            |  |         |   |           |   | 14.6     |   | 14.6    |  
|Exercise
      of share options                                              |  |        |  |        |  |            |  |         |   |           |   | (0.5     | ) | (0.5    | )
|Fair
      value loss on cashflow hedges                                     |  |        |  |        |  |            |  |         |   |           |   | (0.7     | ) | (0.7    | )
|Exchange
      adjustments                                                   |  |        |  |        |  |            |  |         |   | (1.5       | ) |         |   | (1.5    | )
|                                                                             |  |         |  |         |  |             |  |          |   |            |   |          |   |         |  
|At
      31 March 2006                                                       |  | 875.4   |  | 1,407.8 |  | 158.8       |  | (0.3     | ) | 2.2        |   | 185.3    |   | 2,629.2 |  
|                                                                             |  |         |  |         |  |             |  |          |   |            |   |          |   |         |  



|96 | United
        Utilities Annual Report & Accounts 2006
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| |  | ------------------------
| |  | Financial
    statements
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| |  |                         

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23
    Shareholders equitycontinued

|                                                       |         |  | Share   |  |          |   | Cumulative |  |          |   |         |  
|------------------------------------------------------ | ------- |  | ------- |  | -------- | - | ---------- |  | -------- | - | ------- | -
|                                                       | Share   |  | premium |  | Treasury |   | exchange   |  | Retained |   |         |  
|                                                       | capital |  | account |  | shares   |   | reserve    |  | earnings |   | Total   |  
|Company                                                | £m      |  | £m      |  | £m       |   | £m         |  | £m       |   | £m      |  
|                                                       |         |  |         |  |          |   |            |  |          |   |         |  
|At 1 April 2004                                        | 711.8   |  | 1,023.1 |  | (2.3     | ) |           |  | 3,771.3  |   | 5,503.9 |  
|Loss for the year                                      |        |  |        |  |         |   |           |  | (891.8   | ) | (891.8  | )
|Dividends                                              |        |  |        |  |         |   |           |  | (318.0   | ) | (318.0  | )
|New share capital issued                               | 4.4     |  | 15.6    |  |         |   |           |  |         |   | 20.0    |  
|Own shares held in employee share trust                |        |  |        |  | 2.0      |   |           |  |         |   | 2.0     |  
|Post employment benefits  actuarial losses on         |         |  |         |  |          |   |            |  |          |   |         |  
|defined benefit schemes                                |        |  |        |  |         |   |           |  | (0.6     | ) | (0.6    | )
|Share-based compensation  charged to income statement |        |  |        |  |         |   |           |  | 1.1      |   | 1.1     |  
|Exchange adjustments                                   |        |  |        |  |         |   | 1.1        |  |         |   | 1.1     |  
|                                                       |         |  |         |  |          |   |            |  |          |   |         |  
|At 31 March 2005                                       | 716.2   |  | 1,038.7 |  | (0.3     | ) | 1.1        |  | 2,562.0  |   | 4,317.7 |  
|Adoption of IAS 32 and IAS 39                          |        |  |        |  |         |   |           |  | (14.1    | ) | (14.1   | )
|                                                       |         |  |         |  |          |   |            |  |          |   |         |  
|At 1 April 2005                                        | 716.2   |  | 1,038.7 |  | (0.3     | ) | 1.1        |  | 2,547.9  |   | 4,303.6 |  
|Profit for the year                                    |        |  |        |  |         |   |           |  | 315.0    |   | 315.0   |  
|Dividends                                              |        |  |        |  |         |   |           |  | (344.2   | ) | (344.2  | )
|New share capital issued                               | 159.2   |  | 369.1   |  |         |   |           |  |         |   | 528.3   |  
|Post employment benefits  actuarial gains on          |         |  |         |  |          |   |            |  |          |   |         |  
|defined benefit schemes                                |        |  |        |  |         |   |           |  | 3.6      |   | 3.6     |  
|Share-based compensation  charged to income statement |        |  |        |  |         |   |           |  | 0.9      |   | 0.9     |  
|Exchange adjustments                                   |        |  |        |  |         |   | 4.1        |  |         |   | 4.1     |  
|                                                       |         |  |         |  |          |   |            |  |          |   |         |  
|At 31 March 2006                                       | 875.4   |  | 1,407.8 |  | (0.3     | ) | 5.2        |  | 2,523.2  |   | 4,811.3 |  
|                                                       |         |  |         |  |          |   |            |  |          |   |         |  

The authorised
  ordinary share capital of the company was 1,119,000,000 ordinary shares of £1
  each at 31 March 2006 (2005: 1,119,000,000). The allotted and fully paid ordinary
  share capital of the company at 31 March 2006 was 875,422,577 ordinary shares
  (2005: 561,572,377). The five-for-nine rights issue, structured so that the
  proceeds were received in two stages, was approved at the extraordinary general
  meeting of shareholders on 26 August 2003. The first tranche of the proceeds,
  received during September 2003, raised £501.2 million (net of costs) from
  the issuing of 309,286,997 A shares. The second tranche of proceeds received
  in June 2005 raised £508.1 million (net of costs) reflecting the subscription
  of 309,286,997 further A shares. In July 2005, all A shares were then consolidated
  and reclassified as ordinary shares on the basis of one ordinary share for two
  A shares. 4,563,203 ordinary shares were allotted during the year ended 31 March
  2006 (2005: 4,444,371) for the exercise of options in accordance with the rules
  of the employee ShareSave schemes and the executive share option scheme for
  a total consideration of £20.2 million (2005: £20.0 million). The
  company has one class of ordinary shares which carry no rights to fixed dividends.

As
  allowed by section 230(4) of the Companies Act 1985, the company has not presented
  its own income statement. The amount of group profit for the financial year
  dealt with in the companys income statement is £315.0 million (2005:
  loss of £891.8 million) after accounting for dividends received from subsidiary
  undertakings of £323.6 million (2005: £302.2 million).

In
  the preparation of the companys financial statements for the year ended
  31 March 2006, the directors have reconsidered the accounting treatment adopted
  in respect of the adjustments to the carrying value of certain investments in
  subsidiaries. The carrying value of certain subsidiaries was increased by £2,544.8
  million during the year ended 31 March 2001 and subsequently decreased by £1,201.0
  million during the year ended 31 March 2005. These adjustments to value were
  recognised directly in reserves. After consideration, the directors have concluded
  that the adjustments should have been recognised in the companys income
  statements for the years ended 31 March 2001 and31
  March 2005 respectively. Accordingly, the comparative disclosure in relation
  to the profit of the company, which is disclosed in the table above, has been
  restated by £1,201.0 million resulting in a loss for the year of £891.8
  million. The separate reserve in which the adjustments were previously recognised
  has been reclassified to retained earnings. There is no overall impact on distributable
  reserves.

The
  revaluation reserve represents the uplift to deemed cost of the groups
  water and wastewater infrastructure assets on transition to IFRS, net of taxation.



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          Utilities Annual Report & Accounts 2006 | 97
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| |                          | 
| | ------------------------ | 
| | Financial
    statements | 
| |                          | 
| |                          | 

|                                                            
|------------------------------------------------------------
|Notes
    to the consolidated financial statements continued
|                                                            



24 Acquisition of subsidiary undertakingsOn
    12 May 2005, the group acquired 100 per cent of the issued share capital of
    Vertex Financial Services Holdings Limited (formerly Marlborough Stirling Group
    plc) for cash consideration of £97.3 million including attributable costs.

On
     30 March 2006, the group and company acquired 100 per cent of the issued
    share
  capital of 1st Software Group Limited for initial cash consideration of £25.3
   million. Potential further consideration of up to £13.5 million is payable
    subject to performance over the next two years.

The
  transactions have been accounted for by the purchase method of accounting. The
  net assets acquired in the transactions, and the goodwill arising, are as follows:

|                                                 | Vertex Financial Services Holdings Limited |   | 1st
       Software Group Limited |  
|------------------------------------------------ | ------------------------------------------ | - | --------------------------------- | -
|                                                 |                                            |   |                                   |  
|                                                 |                                            |   | Fair value                        |  
|                                                 | Book value                                 |   | adjustments                       |  
|                                                 | £m                                         |   | £m                                |  
|                                                 |                                            |   |                                   |  
|Property, plant and equipment                    | 16.8                                       |   | (12.3                             | )
|Other intangible assets                          |                                           |   | 77.0                              |  
|Trade and other receivables                      | 18.1                                       |   |                                  |  
|Cash and cash equivalents                        | 20.8                                       |   |                                  |  
|Trade and other payables                         | (32.6                                      | ) |                                  |  
|Provisions                                       | (3.9                                       | ) | (34.3                             | )
|Deferred tax assets                              | 3.1                                        |   | 4.0                               |  
|Deferred tax liabilities                         |                                           |   | (9.0                              | )
|                                                 |                                            |   |                                   |  
|                                                 | 22.3                                       |   | 25.4                              |  
|Goodwill                                         |                                            |   |                                   |  
|                                                 |                                            |   |                                   |  
|Total consideration satisfied by cash and        |                                            |   |                                   |  
|contingent consideration                         |                                            |   |                                   |  
|                                                 |                                            |   |                                   |  
|Net cashflows arising on acquisition:            |                                            |   |                                   |  
|Cash consideration                               |                                            |   |                                   |  
|Attributable costs                               |                                            |   |                                   |  
|                                                 |                                            |   |                                   |  
|                                                 |                                            |   |                                   |  
|Cash and cash equivalents acquired               |                                            |   |                                   |  
|Contingent consideration less amounts receivable |                                            |   |                                   |  
|                                                 |                                            |   |                                   |  
|                                                 |                                            |   |                                   |  
|                                                 |                                            |   |                                   |  

The goodwill
  arising on the acquisitions represents the excess of consideration over the
  fair value of the net assets and liabilities acquired.

Vertex
  Financial Services Holdings Limited contributed £74.7 million revenue
  and £9.9 million loss to the groups profit before tax for the period
  between the date of acquisition and the balance sheet date.

As
     1st Software Group Limited was acquired on 30 March 2006, it did not materially
    contribute
  to the groups revenue and profit before tax for the period between the
   date of acquisition and the balance sheet date.

If
  both acquisitions had been completed on 1 April 2005, total group revenue for
  the period would have been £2,480.6 million and profit for the year would
  have been £312.9 million respectively, from continuing operations.

In
  addition to the cashflows above, £0.6 million deferred consideration was
  paid in relation to the acquisition of First Revenue Assurance LLC from the
  previous year.



|98 | United
        Utilities Annual Report & Accounts 2006
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| |  | Financial
        statements
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25 Obligations under finance leases

|                                                |                        |  | Present value of minimum | 
|----------------------------------------------- | ---------------------- |  | ------------------------ | 
|                                                | Minimum lease payments |  | lease payments           | 
|                                                |                        |  |                          | 
|                                                | 2006                   |  | 2005                     | 
|                                                | £m                     |  | £m                       | 
|                                                |                        |  |                          | 
|Amounts payable under finance leases:           |                        |  |                          | 
|Within one year                                 | 5.3                    |  | 0.8                      | 
|In the second to fifth years inclusive          | 32.9                   |  | 27.6                     | 
|After five years                                | 42.3                   |  | 52.6                     | 
|                                                |                        |  |                          | 
|                                                | 80.5                   |  | 81.0                     | 
|                                                |                        |  |                          | 
|Present value of lease obligations              |                        |  |                          | 
|Less amount due for settlement within 12 months |                        |  |                          | 
|                                                |                        |  |                          | 
|Amount due for settlement after 12 months       |                        |  |                          | 
|                                                |                        |  |                          | 

It is
  the groups policy to lease certain of its fixtures and equipment under
  finance leases. The average lease term is eight years. For the year ended 31
  March 2006, the average effective borrowing rate was 6.37 per cent. Interest
  rates are fixed at the contract date and thus expose the group to fair value
  interest rate risk. All leases are on a fixed repayment basis and no arrangements
  have been entered into for contingent rental payments.

The
  directors consider that the fair value of the groups lease obligations
  approximates to their carrying amount.

The
  groups obligations under finance leases are secured by the lessors
  title to the leased assets.

26
  Operating lease commitments

|                                                             |          |  |           |  |          |  |           | 
|------------------------------------------------------------ | -------- |  | --------- |  | -------- |  | --------- | 
|                                                             |          |  | 2006      |  |          |  | 2005      | 
|                                                             |          |  |           |  |          |  |           | 
|                                                             |          |  |           |  |          |  |           | 
|                                                             |          |  | Plant and |  |          |  | Plant and | 
|                                                             | Property |  | equipment |  | Property |  | equipment | 
|                                                             | £m       |  | £m        |  | £m       |  | £m        | 
|                                                             |          |  |           |  |          |  |           | 
|Commitments under non-cancellable operating leases expiring: |          |  |           |  |          |  |           | 
|Within one year                                              | 0.1      |  | 0.1       |  | 0.3      |  | 0.9       | 
|In the second to fifth years inclusive                       | 12.2     |  | 0.8       |  | 5.4      |  | 4.3       | 
|After five years                                             | 233.4    |  | 2.8       |  | 192.1    |  | 0.4       | 
|                                                             |          |  |           |  |          |  |           | 
|                                                             | 245.7    |  | 3.7       |  | 197.8    |  | 5.6       | 
|                                                             |          |  |           |  |          |  |           | 

27 Share-based paymentsThe
  company operates several share option schemes. Options are exercisable at a
  price equal to the average quoted market price of the companys shares
  on the date of grant. Options are forfeited if the employee leaves the group
  before the options vest.

Equity
  settled share-based payments are measured at fair value at the date of grant.
  The fair value determined at the date of grant of equity settled share-based
  payments is expensed on a straight-line basis over the vesting period, based
  on the groups estimate of shares that will eventually vest.

Fair
  value is measured by use of both simulation and binomial models according to
  the relevant measures of performance. The models include adjustments, based
  on managements best estimate, for the effects of exercise restrictions,
  behavioural considerations and expected dividend payments. The option life is
  derived by the models based on these assumptions and other assumptions identified
  below.

The
  total expense included within operating profit in respect of share-based payments
  was £5.1 million (2005: £4.7 million).

The
  United Utilities Employee Share Trust was established by a trust deed executed
  on 21 August 1996. The Trustees hold the trust fund for the benefit of the beneficiaries
  (being employees or former employees of the groups companies and their
  relatives) to the extent determined by the rules of the share schemes. As at
  31 March 2006, the Trust held 52,500 shares on trust and these shares will be
  used to satisfy awards payable under the groups performance share plan.
  All dividends payable on the shares during the year were waived.

Further
  details of the different types of share-based payments are as follows:

Company share option scheme 1999The
  company share option scheme 1999 is for senior executives (excluding, with effect
  from the introduction of the groups long-term incentive plan, executive
  directors and other executives participating in that plan and its successor,
  the performance share plan).

Options
  under the company share option scheme 1999 are exercisable in a period beginning
  no earlier than three years (five years for discounted options under the former
  executive share option scheme, which are no longer granted) and ending no later
  than ten years from the date of grant.

Employee ShareSave schemeThe
  employee ShareSave scheme is available to all eligible employees and is based
  on SAYE savings contracts with options exercisable within a six-month period
  from the conclusion of a three or five-year period as appropriate from the date
  of grant. Under the terms and conditions of this scheme, for every month (up
  to no more than six months) an employee fails to contribute the agreed monthly
  amount determined under the rules of the scheme the last date exercisable will
  be delayed by one month.



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          Utilities Annual Report & Accounts 2006 | 99
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| | ---------------------------- | 
| | Financial
        statements | 
| |                              | 

|                                                            
|------------------------------------------------------------
|                                                            
|Notes
    to the consolidated financial statements continued
|                                                            



27
  Share-based paymentscontinued

Performance share planThe
  performance share plan (PSP) is for senior executives of the group. Options
  under the performance share plan are exercisable no earlier than three years
  from the 31 March preceding the grant and have an exercise period of three months.
  PSP awards are subject to a Total Shareholder Return (TSR) performance
  condition (a market-based measure of performance).

Vertex performance share planThe Vertex
PSP is for senior executives of the group. Options under the Vertex performance
share plan are exercisable no earlier than three years from the 31 March preceding
the grant and have an exercise period of three months. Vertex PSP awards are
subject to both a TSR performance condition (a market-based measure of performance)
and earnings before interest, taxation and amortisation (EBITA) and return on
capital employed (ROCE) performance conditions (non-market based
measures of performance).

Cash-settled share-based payments
The group
issued to certain employees share appreciation rights (SARs)
that require the group to pay the intrinsic value of the SAR to the employee
at the date of exercise.
At 31
March 2006, the group has recorded liabilities of £0.3 million (2005: £nil). The fair value of the SARs is determined using the Black-Scholes pricing model using the assumptions noted below. The group recorded total expenses of
£0.3 million (2005: £nil) during the year in respect of SARs. At 31 March 2006, the total intrinsic value of the vested SARs was £nil (2005: £nil).

Other share-based payment planThe main
all-employee scheme is the Inland Revenue approved share incentive plan, ShareBuy. This is a flexible way for employees to acquire shares in the company by
buying partnership shares up to the lower of £1,500 or ten 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 reinvest the dividends on partnership shares to buy more shares under the plan. In 2004, the company introduced matching shares.
It gives one free share for every five partnership shares bought. The shares
need to be held in trust for a five-year term in order to retain the maximum
tax advantages.

For those share option awards and SARs which gave rise to an expense in the year ended 31 March 2006, the assumptions used in the calculation of the fair values were as
follows:

|                                                                               | Company            |  | Employee  |  |                  |  | Vertex           |  | Cash
      settled | 
|------------------------------------------------------------------------------ | ------------------ |  | --------- |  | ---------------- |  | ---------------- |  | ------------------ | 
|                                                                               | share
      option |  | ShareSave |  | Performance      |  | performance      |  | share-based        | 
|                                                                               | scheme
      1999  |  | scheme    |  | share
      plan |  | share
      plan |  | payments           | 
|                                                                               |                    |  |           |  |                  |  |                  |  |                    | 
|Weighted
      average exercise price (£)                                      | 5.44               |  | 4.05      |  |                 |  |                 |  |                   | 
|Vesting
      period (years)                                                   | 3.0                |  | 3.4       |  | 3.0              |  | 3.0              |  | 3.0                | 
|Expected
      volatility (%)                                                  | 26.7               |  | 28.4      |  | 17.6             |  | 18.7             |  | 14.0               | 
|Expected
      option life after adjustment for anticipated forfeiture (years) | 6.5                |  | 3.49      |  | 2.8              |  | 2.8              |  | 1.8                | 
|Risk
      free rate (%)                                                       | 4.40               |  | 4.44      |  | 4.12             |  | 4.25             |  | 4.38               | 
|Expected
      dividend yield (%)                                              | 9.33               |  | 9.24      |  | 8.57             |  | 7.37             |  | 6.34               | 
|Fair
      value (£ per share)                                                 | 0.68               |  | 0.81      |  | 1.99             |  | 7.14             |  | 6.24               | 
|                                                                               |                    |  |           |  |                  |  |                  |  |                    | 

For those share option awards and SARs which gave rise to an expense in the year ended 31 March 2005, the assumptions used in the calculation of the fair values were as
follows:

|                                                                               | Company            |  | Employee  |  |                  |  | Vertex           |  | Cash
      settled | 
|------------------------------------------------------------------------------ | ------------------ |  | --------- |  | ---------------- |  | ---------------- |  | ------------------ | 
|                                                                               | share
      option |  | ShareSave |  | Performance      |  | performance      |  | share-based        | 
|                                                                               | scheme
      1999  |  | scheme    |  | share
      plan |  | share
      plan |  | payments           | 
|                                                                               |                    |  |           |  |                  |  |                  |  |                    | 
|Weighted
      average exercise price (£)                                      | 5.44               |  | 4.07      |  |                 |  |                 |  |                   | 
|Vesting
      period (years)                                                   | 3.0                |  | 3.66      |  | 3.0              |  | 3.0              |  | 3.0                | 
|Expected
      volatility (%)                                                  | 26.7               |  | 28.2      |  | 18.8             |  | 20.5             |  | 14.3               | 
|Expected
      option life after adjustment for anticipated forfeiture (years) | 6.5                |  | 3.80      |  | 2.8              |  | 2.7              |  | 1.2                | 
|Risk
      free rate (%)                                                       | 4.40               |  | 4.44      |  | 4.44             |  | 4.44             |  | 4.49               | 
|Expected
      dividend yield (%)                                              | 9.33               |  | 9.24      |  | 9.35             |  | 8.0              |  | 6.48               | 
|Fair
      value (£ per share)                                                 | 0.68               |  | 0.79      |  | 1.95             |  | 6.64             |  | 6.48               | 
|                                                                               |                    |  |           |  |                  |  |                  |  |                    | 



|100 | United
    Utilities Annual Report & Accounts 2006
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| |  | Financial
    statements
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|
|
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27
  Share-based paymentscontinued

The
  expected volatility is based on the historic volatility of the companys
  share price over the expected life of the option. The movement in total outstanding
  options in respect of the awards identified above is provided below:

|                                   |                          |   |                        |  |                 |   |                  |  |                 |   |                  |  |                 |   | Vertex          |  | Cash            |  
|---------------------------------- | ------------------------ | - | ---------------------- |  | --------------- | - | ---------------- |  | --------------- | - | ---------------- |  | --------------- | - | --------------- |  | --------------- | -
|                                   | Company
      share      |   | Employee               |  |                 |   | Performance      |  |                 |   | performance      |  | share-based     |  
|                                   | option
      scheme 1999 |   | ShareSave
      scheme |  |                 |   | share
      plan |  |                 |   | share
      plan |  | payments        |  
|                                   |                          |   |                        |  |                 |   |                  |  |                 |   |                  |  |                 |  
|                                   |                          |   | Weighted               |  |                 |   | Weighted         |  |                 |   | Weighted         |  |                 |   | Weighted        |  |                 |  
|                                   |                          |   | average                |  |                 |   | average          |  |                 |   | average          |  |                 |   | average         |  |                 |  
|                                   | Number
      of          |   | exercise               |  | Number
      of |   | exercise         |  | Number
      of |   | exercise         |  | Number
      of |   | exercise        |  | Number
      of |  
|                                   | options                  |   | price
      (£)        |  | options         |   | price
      (£)  |  | options         |   | price
      (£)  |  | options         |   | price
      (£) |  | SARs            |  
|                                   |                          |   |                        |  |                 |   |                  |  |                 |   |                  |  |                 |   |                 |  |                 |  
|Outstanding
      at 1 April 2004  | 807,343                  |   | 5.44                   |  | 4,359,784       |   |                 |  | 1,477,986       |   |                 |  |                |   |                |  |                |  
|Granted                            |                         |   |                       |  |                |   |                 |  | 1,276,414       |   |                 |  | 466,435         |   |                |  | 66,008          |  
|Forfeited                          |                         |   |                       |  | (252,142        | ) |                 |  | (70,923         | ) |                 |  | (9,004          | ) |                |  |                |  
|Exercised                          | (8,392                   | ) | 5.44                   |  | (13,896         | ) |                 |  | (235            | ) |                 |  |                |   |                |  |                |  
|Expired                            | (43,924                  | ) | 5.44                   |  | (18,249         | ) |                 |  |                |   |                 |  |                |   |                |  |                |  
|                                   |                          |   |                        |  |                 |   |                  |  |                 |   |                  |  |                 |   |                 |  |                 |  
|Outstanding
      at 1 April 2005  | 755,027                  |   | 5.44                   |  | 4,075,497       |   | 4.09             |  | 2,683,242       |   |                 |  | 457,431         |   |                |  | 66,008          |  
|Granted                            |                         |   |                       |  |                |   |                 |  | 1,227,911       |   |                 |  | 551,991         |   |                |  | 80,632          |  
|Forfeited                          |                         |   |                       |  | (284,292        | ) | 4.06             |  | (280,467        | ) |                 |  | (95,726         | ) |                |  | (19,233         | )
|Exercised                          | (313,478                 | ) | 5.44                   |  | (968,228        | ) | 4.20             |  |                |   |                 |  |                |   |                |  |                |  
|Expired                            | (20,596                  | ) | 5.44                   |  | (12,106         | ) | 4.06             |  |                |   |                 |  |                |   |                |  |                |  
|                                   |                          |   |                        |  |                 |   |                  |  |                 |   |                  |  |                 |   |                 |  |                 |  
|Outstanding
      at 31 March 2006 | 420,953                  |   | 5.44                   |  | 2,810,871       |   | 4.05             |  | 3,630,686       |   |                 |  | 913,696         |   |                |  | 127,407         |  
|                                   |                          |   |                        |  |                 |   |                  |  |                 |   |                  |  |                 |   |                 |  |                 |  
|Range
      of prices:             |                          |   |                        |  |                 |   |                  |  |                 |   |                  |  |                 |   |                 |  |                 |  
|31
      March 2006                |                          |   | 5.44                   |  |                 |   | 3.96-4.23        |  |                 |   |                 |  |                 |   |                |  |                |  
|                                   |                          |   |                        |  |                 |   |                  |  |                 |   |                  |  |                 |   |                 |  |                 |  
|31
      March 2005                |                          |   | 5.44                   |  |                 |   | 3.96-4.23        |  |                 |   |                 |  |                 |   |                |  |                |  
|                                   |                          |   |                        |  |                 |   |                  |  |                 |   |                  |  |                 |   |                 |  |                 |  
|Contractual
      remaining life:  |                          |   |                        |  |                 |   |                  |  |                 |   |                  |  |                 |   |                 |  |                 |  
|31
      March 2006                | 6.7
      years          |   |                        |  | 2.4
      years |   |                  |  | 2.3
      years |   |                  |  | 2.3
      years |   |                 |  | 2.3
      years |  
|                                   |                          |   |                        |  |                 |   |                  |  |                 |   |                  |  |                 |   |                 |  |                 |  
|31
      March 2005                | 7.7
      years          |   |                        |  | 3.4
      years |   |                  |  | 2.3
      years |   |                  |  | 2.3
      years |   |                 |  | 2.3
      years |  
|                                   |                          |   |                        |  |                 |   |                  |  |                 |   |                  |  |                 |   |                 |  |                 |  

None
  of the share options identified above as outstanding at 31 March 2006 had vested
  at that date.

Options
  outstanding at 31 March under the share option schemes which are outside the
  scope of IFRS 2 Share-based Payment, together with their exercise
  prices and dates, were:

|                                       |           |  |           |  | Exercise |     | Normal
      dates | 
|-------------------------------------- | --------- |  | --------- |  | -------- | --- | ------------------ | 
|                                       | 2006      |  | 2005      |  | price    |     | of
      exercise  | 
|                                       |           |  |           |  |          |     |                    | 
|Employee
      ShareSave scheme        |          |  | 220,027   |  | 407.7p   | (1) | 2003
      or 2005 | 
|                                       | 50,575    |  | 730,638   |  | 481.2p   | (1) | 2004
      or 2006 | 
|                                       | 901,517   |  | 1,132,775 |  | 432.3p   | (1) | 2005
      or 2007 | 
|                                       |           |  |           |  |          |     |                    | 
|Executive
      share option scheme    |          |  | 55,791    |  | 505.4p   | (2) | 1998
      to 2005 | 
|                                       | 27,475    |  | 68,361    |  | 470.8p   | (2) | 1999
      to 2006 | 
|                                       | 72,543    |  | 145,412   |  | 543.0p   | (2) | 2000
      to 2007 | 
|                                       | 63,097    |  | 90,496    |  | 546.4p   | (2) | 2000
      to 2007 | 
|                                       | 237,588   |  | 333,309   |  | 664.5p   | (2) | 2000
      to 2007 | 
|                                       | 111,178   |  | 128,947   |  | 766.0p   | (2) | 2001
      to 2008 | 
|                                       | 170,825   |  | 180,365   |  | 750.5p   | (2) | 2001
      to 2008 | 
|                                       | 553,261   |  | 685,349   |  | 664.0p   | (2) | 2002
      to 2009 | 
|                                       |           |  |           |  |          |     |                    | 
|Company
      share option scheme 1999 | 91,100    |  | 162,868   |  | 532.2p   | (2) | 2002
      to 2009 | 
|                                       | 423,842   |  | 633,714   |  | 587.9p   | (2) | 2003
      to 2010 | 
|                                       | 190,543   |  | 303,336   |  | 575.8p   | (2) | 2003
      to 2010 | 
|                                       | 402,966   |  | 682,259   |  | 563.7p   | (2) | 2004
      to 2011 | 
|                                       | 206,056   |  | 389,742   |  | 509.3p   | (2) | 2005
      to 2012 | 
|                                       | 714,913   |  | 1,382,215 |  | 528.3p   | (2) | 2005
      to 2012 | 
|                                       |           |  |           |  |          |     |                    | 
|                                       | 4,217,479 |  | 7,325,604 |  |          |     |                    | 
|                                       |           |  |           |  |          |     |                    | 

|Notes:
|------
|      
|(1)   
|(2)   



|United
          Utilities Annual Report & Accounts 2006 | 101
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| |                          | 
| | ------------------------ | 
| | Financial
    statements | 
| |                          | 

|                                                            
|------------------------------------------------------------
|                                                            
|Notes
    to the consolidated financial statements continued
|                                                            



28
  Related party transactions

Transactions
  between the company and its subsidiaries, which are related parties, have been
  eliminated on consolidation and are not disclosed in this note.

Trading
  transactionsThe
  following transactions were carried out with other related parties:

|Group                |      |  |                      |  |                          |  |                                       |  |                                       | 
|-------------------- | ---- |  | -------------------- |  | ------------------------ |  | ------------------------------------- |  | ------------------------------------- | 
|                     |      |  | Sales
      of goods |  | Purchases
      of goods |  | Amounts
      owed by related parties |  | Amounts
      owed to related parties | 
|                     |      |  |                      |  |                          |  |                                       |  |                                       | 
|                     | 2006 |  | 2005                 |  | 2006                     |  | 2005                                  |  | 2006                                  | 
|                     | £m   |  | £m                   |  | £m                       |  | £m                                    |  | £m                                    | 
|                     |      |  |                      |  |                          |  |                                       |  |                                       | 
|Joint
      ventures | 80.3 |  | 71.1                 |  | 28.1                     |  |                                      |  | 21.7                                  | 
|                     |      |  |                      |  |                          |  |                                       |  |                                       | 
|Associate            | 1.0  |  |                     |  | 0.5                      |  |                                      |  | 0.8                                   | 
|                     |      |  |                      |  |                          |  |                                       |  |                                       | 
|

Sale
  of goods to related parties were on the groups normal trading terms.

CompanyThe
  parent company receives dividend and interest income from, and recharges certain
  costs to, subsidiary undertakings in the normal course of business.

Total
  income received during the year amounted to £341.1 million (2005: £314.6
  million) and total recharges were £12.1 million (2005: £(17.2) million).

Amounts
  outstanding at 31 March 2006 and 2005 between the parent company and subsidiary
  undertakings are provided in notes 15 and 22. There were no amounts outstanding
  between the parent company and its associate at 31 March 2006 or 31 March 2005.

Related
  party receivables and payables are not secured and no guarantees were issued
  in respect thereof and will be settled in accordance with normal credit terms.

The
  directors and key management of the company are considered to be the same as
  for the group. Information on the remuneration of key management personnel can
  be found in note 2 of these financial statements.

29 Cash generated from/(used in) operations

|                                                           |         |   | Group  |   |       |   | Company |  
|---------------------------------------------------------- | ------- | - | ------ | - | ----- | - | ------- | -
|                                                           |         |   |        |   |       |   |         |  
|                                                           | 2006    |   | 2005   |   | 2006  |   | 2005    |  
|                                                           | £m      |   | £m     |   | £m    |   | £m      |  
|                                                           |         |   |        |   |       |   |         |  
|Continuing
      operations                                |         |   |        |   |       |   |         |  
|Profit
      before taxation                               | 439.3   |   | 367.6  |   | 44.5  |   | 54.9    |  
|Adjustment
      for investment income and finance expense | 300.7   |   | 283.8  |   | (37.6 | ) | (48.6   | )
|                                                           |         |   |        |   |       |   |         |  
|Operating
      profit                                     | 740.0   |   | 651.4  |   | 6.9   |   | 6.3     |  
|Restructuring
      costs within operating profit          | 25.5    |   | 29.7   |   |      |   |        |  
|Adjustments
      for:                                     |         |   |        |   |       |   |         |  
|Depreciation
      of property, plant and equipment        | 265.0   |   | 268.3  |   |      |   |        |  
|Amortisation
      of intangible assets                    | 55.3    |   | 62.6   |   |      |   |        |  
|Profit
      on disposal of property, plant and equipment  | (4.8    | ) | (4.4   | ) |      |   |        |  
|Changes
      in working capital:                          |         |   |        |   |       |   |         |  
|Decrease/(increase)
      in inventories                   | 8.7     |   | (3.2   | ) |      |   |        |  
|(Increase)/decrease
      in trade and other receivables   | (153.2  | ) | 25.2   |   | (7.2  | ) | (10.1   | )
|Increase/(decrease)
      in provisions and payables       | 81.7    |   | (269.0 | ) | (25.2 | ) | 346.1   |  
|Outflow
      related to restructuring costs               | (13.7   | ) | (28.4  | ) | 0.2   |   | (0.3    | )
|                                                           |         |   |        |   |       |   |         |  
|Cash
      generated from/(used in) continuing operations  | 1,004.5 |   | 732.2  |   | (25.3 | ) | 342.0   |  
|                                                           |         |   |        |   |       |   |         |  
|                                                           |         |   |        |   |       |   |         |  
|Discontinued
      operation                               |         |   |        |   |       |   |         |  
|Loss
      from operations                                 | (17.6   | ) | (11.5  | ) |       |   |         |  
|Adjustments
      for:                                     |         |   |        |   |       |   |         |  
|Depreciation
      of property, plant and equipment        | 13.2    |   | 20.9   |   |       |   |         |  
|Amortisation
      of intangible assets                    | 4.9     |   | 6.7    |   |       |   |         |  
|Profit
      on disposal of property, plant and equipment  |        |   |       |   |       |   |         |  
|Changes
      in working capital:                          |         |   |        |   |       |   |         |  
|Decrease/(increase)
      in inventories                   | 0.2     |   | (2.9   | ) |       |   |         |  
|Decrease/(increase)
      in trade and other receivables   | 10.2    |   | (14.8  | ) |       |   |         |  
|Decrease
      in payables                                 | (22.9   | ) | (9.9   | ) |       |   |         |  
|Outflow
      related to restructuring costs               |        |   | (4.4   | ) |       |   |         |  
|                                                           |         |   |        |   |       |   |         |  
|Cash
      used in discontinued operation                  | (12.0   | ) | (15.9  | ) |       |   |         |  
|                                                           |         |   |        |   |       |   |         |  
|



|102 | United
    Utilities Annual Report & Accounts 2006
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| |  |                           
| |  | --------------------------
| |  | Financial
      statements
| |  |                           
| |  |                           

| |  |  | 
| |  |  | 
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29
Cash generated from operationscontinued

The net
  cash inflow for the year ended 31 March 2005 in relation to disposal of subsidiaries
  of £64.8 million relates mainly to the sale of United Utilities Green
  Energy Limited.

Non-cash
  transactions As described
  in note 7, on 26 February 2006 the group disposed of its interest in the Your
  Communications business, the total fair value of consideration of £68.1
  million was satisfied by the issue of ordinary shares and contingent share options.
  There were no other material non-cash transactions during the year (2005: none)
  affecting either the group or company.

30
  Contingent liabilities

The company
  guaranteed loans of group undertakings up to a maximum amount of £519.5
  million (2005: £654.4 million), including £429.5 million (2005:
  £564.4 million) relating to United Utilities Water PLCs loans from
  European Investment Bank and £90.0 million (2005: £90.0 million)
  relating to United Utilities Electricity PLCs loans from European Investment
  Bank.

The company
  has entered into performance guarantees as at 31 March 2006, where a financial
  limit has been specified of £124.3 million (2005: £84.1 million).

31
  Events after the balance sheet date

There
  were no events arising after the balance sheet date that require recognition
  or disclosure in the financial statements for the year ended 31 March 2006.

32
  Adoption of International Financial Reporting Standards

From
  1 January 2005, all European Union listed companies are required to prepare
  consolidated financial statements under International Financial Reporting Standards
  (IFRS), issued by the International Accounting Standards Board (IASB) and endorsed
  by the European Union. Accordingly, the results for the year ended 31 March
  2006 have been prepared in accordance with IFRS accounting policies. The groups
  previously reported results for the year ended 31 March 2005 have been restated,
  the date of transition to IFRS being 1 April 2004.

In accordance
  with International Financial Reporting Standard 1 First-time Adoption
  of International Financial Reporting Standards (IFRS 1), the groups
  accounting policies under IFRS have been applied retrospectively at the date
  of transition, with the exception of a number of permitted exemptions. These
  are summarised below:

| | The
      application of IAS 32 Financial Instruments: Disclosure and Presentation
      and IAS 39 Financial Instruments: Recognition and Measurement
      with effect from 1 April 2005;            
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                            
| | The
      establishment of a deemed cost for the opening balance sheet carrying value
      of the water and wastewater infrastructure non-current assets by reference
      to fair value at 1 April 2004;
|  |                                                                                                                                                                                                            
| | The
      selection of 1 April 1999 as the date of adoption of IFRS 3 Business
      Combinations and, as a consequence, IAS 38 Intangible Assets
      and IAS 36 Impairment of Assets;             
|  |                                                                                                                                                                                                            
| | The
      application of IFRS 2 Share-based Payment to those share options
      granted after 7 November 2002 but which had not vested by1April
      2004;                                             
|  |                                                                                                                                                                                                            
| | The
      setting to zero of all cumulative translation differences at 1 April 2004;
      and                                                                                                             
|  |                                                                                                                                                                                                            
| | The
      recognition, in full, of all actuarial gains and losses relating to pension
      schemes at 1 April 2004 and, prospectively, through the statement of recognised
      income and expense.      

The major
  areas of impact of IFRS are summarised below:

Infrastructure
  accountingIAS
  16 Property, Plant and Equipment The significant
  impact of IAS 16 relates to the accounting for water and wastewater infrastructure
  assets within the groups licensed multi-utility operations. Under UK GAAP,
  these assets were accounted for in accordance with renewals accounting by which
  the water and wastewater infrastructure networks are assumed to be single assets
  and the depreciation charged is the estimated level of annual expenditure required
  to maintain the operating capability of the networks. Actual expenditure is
  then capitalised as incurred.

Under
  IAS 16 this treatment is not permitted. Therefore, the significant parts within
  the infrastructure networks have been identified and, for each, a useful life
  and residual value determined so that each segment may be depreciated individually.
  Furthermore, the classification between operating expenditure and capital expenditure
  for amounts incurred in maintaining the networks has been reassessed.

In addition,
  a deemed cost has been established for the opening balance sheet carrying value
  of the infrastructure networks by reference to fair value at 1 April 2004.

The
    segments recognised within the water and wastewater networks have been based
    upon asset
  class (for example sewers, water mains and tunnels) since no single pipe or
    section of sewer is significant compared to the total value of the networks.
    This has led to the identification of 14 segments which have been assigned
    zero
  residual values at the end of their useful lives. The lives allocated to these
    segments range from 15 to 300 years. This treatment results in an additional
    depreciation charge of £27.0 million in the 2005 IFRS reported results
     when compared with UK GAAP. Since the UK GAAP classification of expenditure

  between operating expenses and costs to be capitalised remains the most appropriate
     treatment under IAS 16, this additional depreciation directly impacts profit

  before tax.

The election
  to record the carrying value of the water and wastewater infrastructure networks
  at fair value, and to use that fair value as the deemed cost in the opening
  IFRS balance sheet, increases net assets by £145.2 million (net of deferred
  tax) as at 31 March 2005 compared with UK GAAP.

There
  is no impact of IFRS on the amounts reported under UK GAAP for electricity infrastructure
  assets.



|United
          Utilities Annual Report & Accounts 2006 | 103
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| |                            | 
| | -------------------------- | 
| | Financial
      statements | 
| |                            | 

|                                                               |  |  | 
|-------------------------------------------------------------- |  |  | 
|                                                               |  |  | 
|Notes
      to the consolidated financial statements continued |  |  | 
|                                                               |  |  | 



32
  Adoption of International Financial Reporting Standardscontinued

Interests
  in joint ventures IAS
  31 Interests in Joint Ventures For the
  purposes of UK GAAP, FRS 9 Associates and Joint Ventures requires
  joint ventures to be accounted for in consolidated financial statements using
  the gross equity method. IAS 31 does not permit gross equity accounting and
  instead presents the options of equity accounting or proportionate consolidation.

The group
  has elected to apply proportionate consolidation on adoption of IAS 31.

The application
  of proportionate consolidation results in the group including its share of each
  joint venture income statement and balance sheet account caption on a line-by-line
  basis within the consolidated financial statements. Proportionate consolidation
  does not affect operating profit, profit before tax or net assets. However,
  proportionate consolidation does have a material impact on certain individual
  balance sheet captions: most noticeably at 31 March 2005 an increase of £206.0
  million in property, plant and equipment and increased borrowings of £178.9
  million, which is typically non-recourse to the group.

Defined
  benefit pension schemes IAS
  19 Employee Benefits The group
  prepared its 2005 UK GAAP results in accordance with SSAP 24 Accounting
  for Pension Costs, with FRS 17 Retirement Benefits transitional
  disclosures provided in the notes to the accounts. FRS 17 became fully effective
  for accounting periods beginning on or after 1January
  2005. The group has not adopted FRS 17 and has moved directly to IAS 19.

Under
  SSAP 24, any pension scheme surplus or deficit identified at the most recent
  actuarial valuation is recognised gradually through the income statement over
  the average expected future working lifetime of current employees. The net pension
  cost under SSAP 24 therefore includes both the cost of providing an additional
  year of pension benefits to employees (regular cost) and an element of the surplus/deficit
  relating to previous years (variation). The difference between employers
  contributions paid and the SSAP 24 net pension cost is recognised as a prepayment/accrual,
  resulting in a balance sheet position that does not necessarily reflect the
  actuarial position. Interest is calculated on this balance sheet entry and is
  also included within the net pension cost. In accordance with IAS 19, any legal
  and constructive obligation for post employment benefit plans must be immediately
  recognised as an asset or liability on the balance sheet. Where actual experience
  differs from the assumptions made at the start of a financial year, actuarial
  gains and losses will be recognised through the statement of recognised income
  and expense.

The adoption
  of IAS 19 increases the 2005 profit before tax by £4.5 million compared
  with UK GAAP.

The de-recognition
  of the UK GAAP SSAP 24 prepayment reduces net assets by £272.4 million
  (net of deferred tax). The SSAP 24 prepayment reflected the lump sum payment
  of £320.0 million (pre-tax) made at 31 March 2005. Net assets are then
  further reduced by the recognition of the IAS 19 deficit of £59.2 million
  (net of deferred tax).

Business
  combinations IFRS
  3 Business Combinations/IAS 38 Intangible Assets
  Under IFRS,
  the recognition test for intangible assets acquired in business combinations
  is less restrictive than that of UK GAAP, and therefore more intangible assets
  will be separately identified from goodwill. FRS 10 Goodwill and Intangible
  Assets requires an intangible asset to be controlled by the entity through
  custody or legal rights and to be capable of disposal separately from the business.
  By contrast IAS 38 does not require an intangible to be separable from the entity
  if its ownership can be demonstrated through contractual or legal rights.

Goodwill
  is not amortised under IFRS, but rather subject to annual impairment reviews.

Intangible
  assets (other than goodwill) are stated at cost less accumulated amortisation
  and are amortised over their useful lives on a straight-line basis.

IFRS
  3 has a minimal impact on the net assets of the group, with the reduction in
  goodwill broadly offset by the recognition of newly identified intangible assets
  from business combinations (mainly relating to customer lists and contracts).
  However, IAS 12 Income Taxes requires a deferred tax liability to
  be created for any transfers from goodwill to intangible fixed assets. This
  deferred tax liability results in an increase in the goodwill arising on the
  business combinations of £13.8 million as at 31 March 2005.

Since
  goodwill is no longer being amortised, the 2005 amortisation charge reduces
  by £7.5 million. Profit on sale or termination of operations for 2005
  is reduced by £2.1 million due to the reversal of goodwill amortisation
  relating to businesses disposed of in 2004/05.

Deferred
  tax IAS
  12 Income Taxes The major
  impact of IAS 12 relates to discounting of deferred tax not being permitted.
  FRS 19 Deferred Tax permits, but does not require, a deferred tax
  asset or liability to be discounted and as a result the group has been able
  to apply a policy of discounting its deferred tax liability. However, IAS 12
  does not permit discounting in any circumstances. This is of particular significance
  to a utility business where any reversal of timing differences is likely to
  be deferred long into the future due to the long asset lives of network assets.
  The inability to discount results in an increase in the balance sheet deferred
  tax liability of £952.0 million at 31 March 2005 and consequently a reduction
  in net assets.

The deferred
  tax impacts arising from any other IFRS adjustments are included in the relevant
  sections.

Dividends IAS
  10 Events After the Balance Sheet Date IAS 10
  and SSAP 17 Accounting for Post Balance Sheet Events both distinguish
  adjusting events from non-adjusting events with similar
  definitions and applications. However, under IAS 10 dividends may not be recognised
  until they have been appropriately authorised and are no longer at the discretion
  of the entity. Therefore, if this occurs after the balance sheet date, the dividends
  are not recognised as a liability at the balance sheet date. However, they are
  disclosed in the notes to the accounts in accordance with IAS 1 Presentation
  of Financial Statements.

Dividends
  are no longer recognised within the income statement and are recorded directly
  within reserves. The final dividend of £219.4 million included with the
  UK GAAP financial statements for 2004/05 has been reversed at 31 March 2005,
  thereby increasing net assets.



|104 | United Utilities Annual Report & Accounts 2006
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| |  | ----------------------------
| |  | Financial
        statements
| |  |                             
| |  |                             

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| |  |  | 
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32
  Adoption of International Financial Reporting Standardscontinued

Accounting
  for derivatives IAS
  39 Financial Instruments: Recognition and Measurement The group
  is taking the exemption offered by IFRS 1 to apply IAS 39 with effect from 1
  April 2005 rather than 1 April 2004 (the date of transition). The comparative
  information for 2004/05 within the 31 March 2006 IFRS financial statements therefore
  reflects derivatives accounted for under UK GAAP.

Under
  UK GAAP, debt is carried at its hedged amount and the fair values of derivatives
  are not recognised in the balance sheet. Under IAS 39, the default treatment
  is for debt to be carried at amortised cost, whilst derivatives are recognised
  separately on the balance sheet at fair value with movements in those fair values
  reflected through the income statement. This has the potential to introduce
  considerable volatility to both the income statement and balance sheet. Therefore,
  for fair value hedges, IAS 39 allows changes in the recognised value of hedged
  debt that are attributable to the hedged risk to be adjusted through the income
  statement. In the case of cashflow hedges, movements in the fair value of derivatives
  are deferred within reserves until they can be recycled through the income statement
  to offset the future income statement effect of changes in the hedged risk.
  In order to apply this treatment, it must be demonstrated that the derivative
  has been and will continue to be an effective hedge of the hedged risk within
  the debt item. Changes in the fair value of all derivatives are recognised in
  the income statement, except for derivatives that are designated and effective
  in terms of cashflow hedging relationships, in which case the gains and losses
  are deferred in equity.

As a
    result of applying IAS 39, liabilities in respect of derivatives and borrowings
    totalling £65.8 million are recognised at 1 April 2005. This is offset by
    a
  reduction in gross debt to account for the hedged risk of £70.4 million,
  resulting in a reduction to net assets of £4.6 million (pre-tax) compared
  with UK GAAP.

Reconciliation
  of equity at 1 April 2004 (Date of transition to IFRS)

|                                     |                   |  | Infra-     |  | Interests
      in |   | Defined
      benefit |   | Business |   |          |   |           |   |        |   |         |  
|------------------------------------ | ----------------- |  | ---------- |  | ------------------ | - | --------------------- | - | -------- | - | -------- | - | --------- | - | ------ | - | ------- | -
|                                     |                   |  | structure  |  | joint              |   | pension               |   | combina- |   | Deferred |   |           |   |        |   |         |  
|                                     | **UK
      GAAP** |  | accounting |  | ventures           |   | schemes               |   | tions    |   | tax      |   | Dividends |   | Other  |   | IFRS    |  
|Group                                | **£m**            |  | £m         |  | £m                 |   | £m                    |   | £m       |   | £m       |   | £m        |   | £m     |   | £m      |  
|                                     |                   |  |            |  |                    |   |                       |   |          |   |          |   |           |   |        |   |         |  
|Property,
      plant and equipment  | 7,769.4           |  | 234.5      |  | 164.9              |   |                      |   |         |   |         |   |          |   | (184.3 | ) | 7,984.5 |  
|Goodwill                             | 116.1             |  |           |  | 16.3               |   |                      |   | 4.9      |   |         |   |          |   | (50.5  | ) | 86.8    |  
|Other
      intangible assets        |                  |  |           |  |                   |   |                      |   |         |   |         |   |          |   | 229.7  |   | 229.7   |  
|Investments                          | 73.0              |  |           |  | (68.0              | ) |                      |   |         |   |         |   |          |   | (2.0   | ) | 3.0     |  
|                                     |                   |  |            |  |                    |   |                       |   |          |   |          |   |           |   |        |   |         |  
|Total
      non-current assets       | 7,958.5           |  | 234.5      |  | 113.2              |   |                      |   | 4.9      |   |         |   |          |   | (7.1   | ) | 8,304.0 |  
|                                     |                   |  |            |  |                    |   |                       |   |          |   |          |   |           |   |        |   |         |  
|Inventories                          | 17.1              |  |           |  | 0.9                |   |                      |   |         |   |         |   |          |   | 9.3    |   | 27.3    |  
|Trade
      and other receivables    | 493.9             |  |           |  | 46.8               |   | (97.0                 | ) |         |   |         |   |          |   | (19.0  | ) | 424.7   |  
|Investments                          | 1,007.8           |  |           |  |                   |   |                      |   |         |   |         |   |          |   | (989.2 | ) | 18.6    |  
|Cash
      and short-term deposits   | 42.1              |  |           |  | 41.1               |   |                      |   |         |   |         |   |          |   | 989.2  |   | 1,072.4 |  
|                                     |                   |  |            |  |                    |   |                       |   |          |   |          |   |           |   |        |   |         |  
|Total
      current assets           | 1,560.9           |  |           |  | 88.8               |   | (97.0                 | ) |         |   |         |   |          |   | (9.7   | ) | 1,543.0 |  
|                                     |                   |  |            |  |                    |   |                       |   |          |   |          |   |           |   |        |   |         |  
|Total
      assets                   | 9,519.4           |  | 234.5      |  | 202.0              |   | (97.0                 | ) | 4.9      |   |         |   |          |   | (16.8  | ) | 9,847.0 |  
|                                     |                   |  |            |  |                    |   |                       |   |          |   |          |   |           |   |        |   |         |  
|Trade
      and other payables       | 314.6             |  |           |  | 1.2                |   |                      |   |         |   |         |   |          |   |        |   | 315.8   |  
|Borrowings                           | 4,387.4           |  |           |  | 167.4              |   |                      |   |         |   |         |   |          |   |       |   | 4,554.8 |  
|Retirement
      benefit obligations |                  |  |           |  |                   |   | 381.3                 |   |         |   |         |   |          |   |       |   | 381.3   |  
|Deferred
      tax                   | 331.4             |  | 68.0       |  | 0.3                |   | (140.4                | ) | 9.1      |   | 942.9    |   |          |   | 6.7    |   | 1,218.0 |  
|Provisions                           | 8.3               |  |           |  | 0.8                |   |                      |   |         |   |         |   |          |   |       |   | 9.1     |  
|                                     |                   |  |            |  |                    |   |                       |   |          |   |          |   |           |   |        |   |         |  
|Total
      non-current liabilities  | 5,041.7           |  | 68.0       |  | 169.7              |   | 240.9                 |   | 9.1      |   | 942.9    |   |          |   | 6.7    |   | 6,479.0 |  
|                                     |                   |  |            |  |                    |   |                       |   |          |   |          |   |           |   |        |   |         |  
|Trade
      and other payables       | 1,169.5           |  |           |  | 29.5               |   | (10.2                 | ) |         |   |         |   | (212.7    | ) | (15.1  | ) | 961.0   |  
|Borrowings                           | 82.3              |  |           |  |                   |   |                      |   |         |   |         |   |          |   |       |   | 82.3    |  
|Current
      income tax liabilities | 123.0             |  |           |  | 2.8                |   |                      |   |         |   |         |   |          |   |       |   | 125.8   |  
|                                     |                   |  |            |  |                    |   |                       |   |          |   |          |   |           |   |        |   |         |  
|Total
      current liabilities      | 1,374.8           |  |           |  | 32.3               |   | (10.2                 | ) |         |   |         |   | (212.7    | ) | (15.1  | ) | 1,169.1 |  
|                                     |                   |  |            |  |                    |   |                       |   |          |   |          |   |           |   |        |   |         |  
|Total
      liabilities              | 6,416.5           |  | 68.0       |  | 202.0              |   | 230.7                 |   | 9.1      |   | 942.9    |   | (212.7    | ) | (8.4   | ) | 7,648.1 |  
|                                     |                   |  |            |  |                    |   |                       |   |          |   |          |   |           |   |        |   |         |  
|Total
      net assets               | 3,102.9           |  | 166.5      |  |                   |   | (327.7                | ) | (4.2     | ) | (942.9   | ) | 212.7     |   | (8.4   | ) | 2,198.9 |  
|                                     |                   |  |            |  |                    |   |                       |   |          |   |          |   |           |   |        |   |         |  
|Share
      capital                  | 711.8             |  |           |  |                   |   |                      |   |         |   |         |   |          |   |       |   | 711.8   |  
|Share
      premium account          | 1,023.1           |  |           |  |                   |   |                      |   |         |   |         |   |          |   |       |   | 1,023.1 |  
|Revaluation
      reserve            |                  |  |           |  |                   |   |                      |   |         |   |         |   |          |   | 158.8  |   | 158.8   |  
|Treasury
      shares                |                  |  |           |  |                   |   |                      |   |         |   |         |   |          |   | (2.3   | ) | (2.3    | )
|Cumulative
      exchange reserve    |                  |  |           |  |                   |   |                      |   |         |   |         |   |          |   |       |   |        |  
|Retained
      earnings              | 1,348.4           |  | 166.5      |  |                   |   | (327.7                | ) | (4.2     | ) | (942.9   | ) | 212.7     |   | (164.9 | ) | 287.9   |  
|                                     |                   |  |            |  |                    |   |                       |   |          |   |          |   |           |   |        |   |         |  
|Shareholders
      equity           | 3,083.3           |  | 166.5      |  |                   |   | (327.7                | ) | (4.2     | ) | (942.9   | ) | 212.7     |   | (8.4   | ) | 2,179.3 |  
|Minority
      interest              | 19.6              |  |           |  |                   |   |                      |   |         |   |         |   |          |   |       |   | 19.6    |  
|                                     |                   |  |            |  |                    |   |                       |   |          |   |          |   |           |   |        |   |         |  
|Total
      equity                   | 3,102.9           |  | 166.5      |  |                   |   | (327.7                | ) | (4.2     | ) | (942.9   | ) | 212.7     |   | (8.4   | ) | 2,198.9 |  
|                                     |                   |  |            |  |                    |   |                       |   |          |   |          |   |           |   |        |   |         |  



|United
          Utilities Annual Report & Accounts 2006 | 105
|-------------------------------------------------------- | ---

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| |                            | 
| | -------------------------- | 
| | Financial
      statements | 
| |                            | 
| |                            | 

|                                                                                                          |  |  | 
|--------------------------------------------------------------------------------------------------------- |  |  | 
|Notes
      to the consolidated financial statements continued
      Operating
      and financial review
|                                                                                                          |  |  | 

32
  Adoption of International Financial Reporting Standardscontinued

Reconciliation
  of equity at 1 April 2004 (Date of transition to IFRS)

|                                     |               |  | Defined |   |           |   |        |   |         |  
|------------------------------------ | ------------- |  | ------- | - | --------- | - | ------ | - | ------- | -
|                                     |               |  | benefit |   |           |   |        |   |         |  
|                                     |               |  | pension |   |           |   |        |   |         |  
|                                     | UK
      GAAP |  | schemes |   | Dividends |   | Other  |   | IFRS    |  
|Company                              | £m            |  | £m      |   | £m        |   | £m     |   | £m      |  
|                                     |               |  |         |   |           |   |        |   |         |  
|Property,
      plant and equipment  | 0.9           |  |        |   |          |   |       |   | 0.9     |  
|Investments                          | 5,738.4       |  |        |   |          |   |       |   | 5,738.4 |  
|                                     |               |  |         |   |           |   |        |   |         |  
|Total
      non-current assets       | 5,739.3       |  |        |   |          |   |       |   | 5,739.3 |  
|                                     |               |  |         |   |           |   |        |   |         |  
|Trade
      and other receivables    | 937.2         |  |        |   | (177.6    | ) |       |   | 759.6   |  
|Investments                          | 637.5         |  |        |   |          |   | (637.5 | ) |        |  
|Cash
      and short-term deposits   | 89.6          |  |        |   |          |   | 637.5  |   | 727.1   |  
|                                     |               |  |         |   |           |   |        |   |         |  
|Total
      current assets           | 1,664.3       |  |        |   | (177.6    | ) |       |   | 1,486.7 |  
|                                     |               |  |         |   |           |   |        |   |         |  
|Total
      assets                   | 7,403.6       |  |        |   | (177.6    | ) |       |   | 7,226.0 |  
|                                     |               |  |         |   |           |   |        |   |         |  
|Borrowings                           | 1,120.6       |  |        |   |          |   |       |   | 1,120.6 |  
|Retirement
      benefit obligations |              |  | 15.6    |   |          |   |       |   | 15.6    |  
|Deferred
      tax                   |              |  |        |   |          |   | 2.1    |   | 2.1     |  
|                                     |               |  |         |   |           |   |        |   |         |  
|Total
      non-current liabilities  | 1,120.6       |  | 15.6    |   |          |   | 2.1    |   | 1,138.3 |  
|                                     |               |  |         |   |           |   |        |   |         |  
|Trade
      and other payables       | 796.0         |  |        |   | (212.7    | ) | (6.9   | ) | 576.4   |  
|Borrowings                           | 7.4           |  |        |   |          |   |       |   | 7.4     |  
|                                     |               |  |         |   |           |   |        |   |         |  
|Total
      current liabilities      | 803.4         |  |        |   | (212.7    | ) | (6.9   | ) | 583.8   |  
|                                     |               |  |         |   |           |   |        |   |         |  
|Total
      liabilities              | 1,924.0       |  | 15.6    |   | (212.7    | ) | (4.8   | ) | 1,722.1 |  
|                                     |               |  |         |   |           |   |        |   |         |  
|Total
      net assets               | 5,479.6       |  | (15.6   | ) | 35.1      |   | 4.8    |   | 5,503.9 |  
|                                     |               |  |         |   |           |   |        |   |         |  
|Share
      capital                  | 711.8         |  |        |   |          |   |       |   | 711.8   |  
|Share
      premium account          | 1,023.1       |  |        |   |          |   |       |   | 1,023.1 |  
|Treasury
      shares                |              |  |        |   |          |   | (2.3   | ) | (2.3    | )
|Cumulative
      exchange reserve    |              |  |        |   |          |   |       |   |        |  
|Retained
      earnings              | 3,744.7       |  | (15.6   | ) | 35.1      |   | 7.1    |   | 3,771.3 |  
|                                     |               |  |         |   |           |   |        |   |         |  
|Shareholders
      equity           | 5,479.6       |  | (15.6   | ) | 35.1      |   | 4.8    |   | 5,503.9 |  
|                                     |               |  |         |   |           |   |        |   |         |  
|



|106 | United Utilities Annual Report & Accounts 2006
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| |  |                           
| |  | --------------------------
| |  | Financial
      statements
| |  |                           
| |  |                           

| | 
| | 
| | 
| | 



32
  Adoption of International Financial Reporting Standardscontinued

Reconciliation
  of equity at 31 March 2005

|                                     |               |  | Infra-     |   | Interests      |   | Defined
      benefit |   | Business |  |          |   |           |   |        |   |          |  
|------------------------------------ | ------------- |  | ---------- | - | -------------- | - | --------------------- | - | -------- |  | -------- | - | --------- | - | ------ | - | -------- | -
|                                     |               |  | structure  |   | in
      joint |   | pension               |   | combina- |  | Deferred |   |           |   |        |   |          |  
|                                     | UK
      GAAP |  | accounting |   | ventures       |   | schemes               |   | tions    |  | tax      |   | Dividends |   | Other  |   | IFRS     |  
|Group                                | £m            |  | £m         |   | £m             |   | £m                    |   | £m       |  | £m       |   | £m        |   | £m     |   | £m       |  
|                                     |               |  |            |   |                |   |                       |   |          |  |          |   |           |   |        |   |          |  
|Property,
      plant and equipment  | 8,234.9       |  | 207.5      |   | 206.0          |   |                      |   |         |  |         |   |          |   | (173.9 | ) | 8,474.5  |  
|Goodwill                             | 116.9         |  |           |   | 11.3           |   |                      |   | 13.8     |  |         |   |          |   | (41.4  | ) | 100.6    |  
|Other
      intangible assets        |              |  |           |   |               |   |                      |   |         |  |         |   |          |   | 192.8  |   | 192.8    |  
|Investments                          | 80.2          |  |           |   | (70.5          | ) |                      |   |         |  |         |   |          |   |       |   | 9.7      |  
|Trade
      and other receivables    |              |  |           |   |               |   |                      |   |         |  |         |   |          |   | 23.4   |   | 23.4     |  
|                                     |               |  |            |   |                |   |                       |   |          |  |          |   |           |   |        |   |          |  
|Total
      non-current assets       | 8,432.0       |  | 207.5      |   | 146.8          |   |                      |   | 13.8     |  |         |   |          |   | 0.9    |   | 8,801.0  |  
|                                     |               |  |            |   |                |   |                       |   |          |  |          |   |           |   |        |   |          |  
|Inventories                          | 19.1          |  |           |   | 2.6            |   |                      |   |         |  |         |   |          |   | 19.2   |   | 40.9     |  
|Trade
      and other receivables    | 774.9         |  |           |   | 31.8           |   | (401.2                | ) |         |  |         |   |          |   | (20.5  | ) | 385.0    |  
|Investments                          | 833.3         |  |           |   | (1.3           | ) |                      |   |         |  |         |   |          |   | (812.3 | ) | 19.7     |  
|Cash
      and short-term deposits   | 49.0          |  |           |   | 41.4           |   |                      |   |         |  |         |   |          |   | 812.3  |   | 902.7    |  
|                                     |               |  |            |   |                |   |                       |   |          |  |          |   |           |   |        |   |          |  
|Total
      current assets           | 1,676.3       |  |           |   | 74.5           |   | (401.2                | ) |         |  |         |   |          |   | (1.3   | ) | 1,348.3  |  
|                                     |               |  |            |   |                |   |                       |   |          |  |          |   |           |   |        |   |          |  
|Total
      assets                   | 10,108.3      |  | 207.5      |   | 221.3          |   | (401.2                | ) | 13.8     |  |         |   |          |   | (0.4   | ) | 10,149.3 |  
|                                     |               |  |            |   |                |   |                       |   |          |  |          |   |           |   |        |   |          |  
|Trade
      and other payables       | 323.3         |  |           |   | 14.0           |   |                      |   |         |  |         |   |          |   |       |   | 337.3    |  
|Borrowings                           | 4,497.2       |  |           |   | 171.8          |   |                      |   |         |  |         |   |          |   |       |   | 4,669.0  |  
|Retirement
      benefit obligations |              |  |           |   |               |   | 84.6                  |   |         |  |         |   |          |   |       |   | 84.6     |  
|Deferred
      tax                   | 395.2         |  | 62.3       |   |               |   | (142.0                | ) | 10.9     |  | 952.0    |   |          |   | 58.9   |   | 1,337.3  |  
|                                     |               |  |            |   |                |   |                       |   |          |  |          |   |           |   |        |   |          |  
|Total
      non-current liabilities  | 5,215.7       |  | 62.3       |   | 185.8          |   | (57.4                 | ) | 10.9     |  | 952.0    |   |          |   | 58.9   |   | 6,428.2  |  
|                                     |               |  |            |   |                |   |                       |   |          |  |          |   |           |   |        |   |          |  
|Trade
      and other payables       | 1,157.0       |  |           |   | 25.7           |   | (12.2                 | ) |         |  |         |   | (219.4    | ) | (1.1   | ) | 950.0    |  
|Borrowings                           | 505.2         |  |           |   | 7.1            |   |                      |   |         |  |         |   |          |   |       |   | 512.3    |  
|Current
      income tax liabilities | 94.4          |  |           |   | 1.6            |   |                      |   |         |  |         |   |          |   |       |   | 96.0     |  
|Provisions                           | 17.3          |  |           |   | 1.1            |   |                      |   |         |  |         |   |          |   |       |   | 18.4     |  
|                                     |               |  |            |   |                |   |                       |   |          |  |          |   |           |   |        |   |          |  
|Total
      current liabilities      | 1,773.9       |  |           |   | 35.5           |   | (12.2                 | ) |         |  |         |   | (219.4    | ) | (1.1   | ) | 1,576.7  |  
|                                     |               |  |            |   |                |   |                       |   |          |  |          |   |           |   |        |   |          |  
|Total
      liabilities              | 6,989.6       |  | 62.3       |   | 221.3          |   | (69.6                 | ) | 10.9     |  | 952.0    |   | (219.4    | ) | 57.8   |   | 8,004.9  |  
|                                     |               |  |            |   |                |   |                       |   |          |  |          |   |           |   |        |   |          |  
|Total
      net assets               | 3,118.7       |  | 145.2      |   |               |   | (331.6                | ) | 2.9      |  | (952.0   | ) | 219.4     |   | (58.2  | ) | 2,144.4  |  
|                                     |               |  |            |   |                |   |                       |   |          |  |          |   |           |   |        |   |          |  
|Share
      capital                  | 716.2         |  |           |   |               |   |                      |   |         |  |         |   |          |   |       |   | 716.2    |  
|Share
      premium account          | 1,038.7       |  |           |   |               |   |                      |   |         |  |         |   |          |   |       |   | 1,038.7  |  
|Revaluation
      reserve            |              |  | 158.8      |   |               |   |                      |   |         |  |         |   |          |   |       |   | 158.8    |  
|Treasury
      shares                |              |  |           |   |               |   |                      |   |         |  |         |   |          |   | (0.3   | ) | (0.3     | )
|Cumulative
      exchange reserve    |              |  |           |   |               |   |                      |   |         |  |         |   |          |   | 3.7    |   | 3.7      |  
|Retained
      earnings              | 1,362.5       |  | (13.6      | ) |               |   | (331.6                | ) | 2.9      |  | (952.0   | ) | 219.4     |   | (61.6  | ) | 226.0    |  
|                                     |               |  |            |   |                |   |                       |   |          |  |          |   |           |   |        |   |          |  
|Shareholders
      equity           | 3,117.4       |  | 145.2      |   |               |   | (331.6                | ) | 2.9      |  | (952.0   | ) | 219.4     |   | (58.2  | ) | 2,143.1  |  
|Minority
      interest              | 1.3           |  |           |   |               |   |                      |   |         |  |         |   |          |   |       |   | 1.3      |  
|                                     |               |  |            |   |                |   |                       |   |          |  |          |   |           |   |        |   |          |  
|Total
      equity                   | 3,118.7       |  | 145.2      |   |               |   | (331.6                | ) | 2.9      |  | (952.0   | ) | 219.4     |   | (58.2  | ) | 2,144.4  |  
|                                     |               |  |            |   |                |   |                       |   |          |  |          |   |           |   |        |   |          |  



|United
          Utilities Annual Report & Accounts 2006 | 107
|-------------------------------------------------------- | ---

---



Back to Contents

| |                            | 
| | -------------------------- | 
| | Financial
      statements | 
| |                            | 
| |                            | 

|                                                               |  |  |                                     
|-------------------------------------------------------------- |  |  | ------------------------------------
|Notes
      to the consolidated financial statements continued |  |  | Operating
      and financial review
|                                                               |  |  |                                     

32
  Adoption of International Financial Reporting Standardscontinued

Reconciliation
  of equity at 31 March 2005

|                                     |               |  | Defined |   |           |   |        |   |         |  
|------------------------------------ | ------------- |  | ------- | - | --------- | - | ------ | - | ------- | -
|                                     |               |  | benefit |   |           |   |        |   |         |  
|                                     |               |  | pension |   |           |   |        |   |         |  
|                                     | UK
      GAAP |  | schemes |   | Dividends |   | Other  |   | IFRS    |  
|Company                              | £m            |  | £m      |   | £m        |   | £m     |   | £m      |  
|                                     |               |  |         |   |           |   |        |   |         |  
|Property,
      plant and equipment  | 0.8           |  |        |   |          |   |       |   | 0.8     |  
|Investments                          | 4,833.1       |  |        |   |          |   |       |   | 4,833.1 |  
|                                     |               |  |         |   |           |   |        |   |         |  
|Total
      non-current assets       | 4,833.9       |  |        |   |          |   |       |   | 4,833.9 |  
|                                     |               |  |         |   |           |   |        |   |         |  
|Trade
      and other receivables    | 1,005.9       |  | (8.2    | ) | (198.6    | ) |       |   | 799.1   |  
|Investments                          | 319.3         |  |        |   |          |   | (319.3 | ) |        |  
|Cash
      and short-term deposits   | 34.6          |  |        |   |          |   | 319.3  |   | 353.9   |  
|                                     |               |  |         |   |           |   |        |   |         |  
|Total
      current assets           | 1,359.8       |  | (8.2    | ) | (198.6    | ) |       |   | 1,153.0 |  
|                                     |               |  |         |   |           |   |        |   |         |  
|Total
      assets                   | 6,193.7       |  | (8.2    | ) | (198.6    | ) |       |   | 5,986.9 |  
|                                     |               |  |         |   |           |   |        |   |         |  
|Borrowings                           | 914.9         |  |        |   |          |   |       |   | 914.9   |  
|Retirement
      benefit obligations |              |  | 8.2     |   |          |   |       |   | 8.2     |  
|Deferred
      tax                   |              |  |        |   |          |   | 3.1    |   | 3.1     |  
|                                     |               |  |         |   |           |   |        |   |         |  
|Total
      non-current liabilities  | 914.9         |  | 8.2     |   |          |   | 3.1    |   | 926.2   |  
|                                     |               |  |         |   |           |   |        |   |         |  
|Trade
      and other payables       | 774.0         |  | (12.1   | ) | (219.4    | ) | (12.0  | ) | 530.5   |  
|Borrowings                           | 212.1         |  |        |   |          |   |       |   | 212.1   |  
|Provisions                           | 0.4           |  |        |   |          |   |       |   | 0.4     |  
|                                     |               |  |         |   |           |   |        |   |         |  
|Total
      current liabilities      | 986.5         |  | (12.1   | ) | (219.4    | ) | (12.0  | ) | 743.0   |  
|                                     |               |  |         |   |           |   |        |   |         |  
|Total
      liabilities              | 1,901.4       |  | (3.9    | ) | (219.4    | ) | (8.9   | ) | 1,669.2 |  
|                                     |               |  |         |   |           |   |        |   |         |  
|Total
      net assets               | 4,292.3       |  | (4.3    | ) | 20.8      |   | 8.9    |   | 4,317.7 |  
|                                     |               |  |         |   |           |   |        |   |         |  
|Share
      capital                  | 716.2         |  |        |   |          |   |       |   | 716.2   |  
|Share
      premium account          | 1,038.7       |  |        |   |          |   |       |   | 1,038.7 |  
|Treasury
      shares                |              |  |        |   |          |   | (0.3   | ) | (0.3    | )
|Cumulative
      exchange reserve    |              |  |        |   |          |   | 1.1    |   | 1.1     |  
|Retained
      earnings              | 2,537.4       |  | (4.3    | ) | 20.8      |   | 8.1    |   | 2,562.0 |  
|                                     |               |  |         |   |           |   |        |   |         |  
|Shareholders
      equity           | 4,292.3       |  | (4.3    | ) | 20.8      |   | 8.9    |   | 4,317.7 |  
|                                     |               |  |         |   |           |   |        |   |         |  

Reconciliation
  of profit for the year ended 31 March 2005

|                                                  |               |   | Infra-     |   | Interests      |   | Defined
      benefit |   | Business |   |          |   |       |   |              |   |          |  
|------------------------------------------------- | ------------- | - | ---------- | - | -------------- | - | --------------------- | - | -------- | - | -------- | - | ----- | - | ------------ | - | -------- | -
|                                                  |               |   | structure  |   | in
      joint |   | pension               |   | combina- |   | Deferred |   |       |   | Discontinued |   |          |  
|                                                  | UK
      GAAP |   | accounting |   | ventures       |   | schemes               |   | tions    |   | tax      |   | Other |   | operation    |   | IFRS     |  
|                                                  | £m            |   | £m         |   | £m             |   | £m                    |   | £m       |   | £m       |   | £m    |   | £m           |   | £m       |  
|                                                  |               |   |            |   |                |   |                       |   |          |   |          |   |       |   |              |   |          |  
|Continuing
      operations                       |               |   |            |   |                |   |                       |   |          |   |          |   |       |   |              |   |          |  
|Revenue                                           | 2,253.9       |   |           |   | 83.5           |   |                      |   |         |   |         |   |      |   | (233.7       | ) | 2,103.7  |  
|                                                  |               |   |            |   |                |   |                       |   |          |   |          |   |       |   |              |   |          |  
|Other
      income                                | 11.9          |   |           |   | 1.2            |   |                      |   | (2.1     | ) |         |   | 8.8   |   |             |   | 19.8     |  
|Employee
      benefits expense                   | (425.8        | ) |           |   |               |   | 4.5                   |   |         |   |         |   | (0.4  | ) | 28.9         |   | (392.8   | )
|Depreciation
      and amortisation expense       | (381.4        | ) | (27.0      | ) | (10.7          | ) |                      |   | 7.5      |   |         |   | (0.4  | ) | 81.3         |   | (330.7   | )
|Other
      operating costs                       | (805.7        | ) |           |   | (51.3          | ) |                      |   |         |   |         |   | 3.1   |   | 135.0        |   | (718.9   | )
|Restructuring
      costs                         | (29.7         | ) |           |   |               |   |                      |   |         |   |         |   |      |   |             |   | (29.7    | )
|                                                  |               |   |            |   |                |   |                       |   |          |   |          |   |       |   |              |   |          |  
|Total
      operating expenses                    | (1,630.7      | ) | (27.0      | ) | (60.8          | ) | 4.5                   |   | 5.4      |   |         |   | 11.1  |   | 245.2        |   | (1,452.3 | )
|                                                  |               |   |            |   |                |   |                       |   |          |   |          |   |       |   |              |   |          |  
|Operating
      profit                            | 623.2         |   | (27.0      | ) | 22.7           |   | 4.5                   |   | 5.4      |   |         |   | 11.1  |   | 11.5         |   | 651.4    |  
|Share
      of operating profit of joint ventures | 22.7          |   |           |   | (22.7          | ) |                      |   |         |   |         |   |      |   |             |   |         |  
|                                                  |               |   |            |   |                |   |                       |   |          |   |          |   |       |   |              |   |          |  
|Total
      operating profit                      | 645.9         |   | (27.0      | ) |               |   | 4.5                   |   | 5.4      |   |         |   | 11.1  |   | 11.5         |   | 651.4    |  
|Profit
      on sale or termination of            |               |   |            |   |                |   |                       |   |          |   |          |   |       |   |              |   |          |  
|operations                                        | 4.5           |   |           |   |               |   |                      |   |         |   |         |   | (4.5  | ) |             |   |         |  
|Profit
      on disposal of fixed assets          | 4.1           |   |           |   |               |   |                      |   |         |   |         |   | (4.1  | ) |             |   |         |  
|                                                  |               |   |            |   |                |   |                       |   |          |   |          |   |       |   |              |   |          |  
|Profit
      before interest                      | 654.5         |   | (27.0      | ) |               |   | 4.5                   |   | 5.4      |   |         |   | 2.5   |   | 11.5         |   | 651.4    |  
|Investment
      income                           | 38.4          |   |           |   |               |   |                      |   |         |   |         |   | (0.1  | ) |             |   | 38.3     |  
|Finance
      expense                             | (322.5        | ) |           |   |               |   |                      |   |         |   |         |   | 0.4   |   |             |   | (322.1   | )
|                                                  |               |   |            |   |                |   |                       |   |          |   |          |   |       |   |              |   |          |  
|Profit
      before taxation                      | 370.4         |   | (27.0      | ) |               |   | 4.5                   |   | 5.4      |   |         |   | 2.8   |   | 11.5         |   | 367.6    |  
|Taxation                                          | (35.5         | ) | 5.8        |   |                |   | (1.3                  | ) | 2.9      |   | (65.6    | ) | (0.3  | ) | (2.1         | ) | (96.1    | )
|                                                  |               |   |            |   |                |   |                       |   |          |   |          |   |       |   |              |   |          |  
|Profit
      for the year from continuing         |               |   |            |   |                |   |                       |   |          |   |          |   |       |   |              |   |          |  
|operations                                        | 334.9         |   | (21.2      | ) |               |   | 3.2                   |   | 8.3      |   | (65.6    | ) | 2.5   |   | 9.4          |   | 271.5    |  
|                                                  |               |   |            |   |                |   |                       |   |          |   |          |   |       |   |              |   |          |  
|Discontinued
      operation                      |               |   |            |   |                |   |                       |   |          |   |          |   |       |   |              |   |          |  
|Loss
      for the year from discontinued         |               |   |            |   |                |   |                       |   |          |   |          |   |       |   |              |   |          |  
|operation                                         |              |   |           |   |               |   |                      |   |         |   |         |   |      |   | (9.4         | ) | (9.4     | )
|                                                  |               |   |            |   |                |   |                       |   |          |   |          |   |       |   |              |   |          |  
|Profit
      for the year                         | 334.9         |   | (21.2      | ) |               |   | 3.2                   |   | 8.3      |   | (65.6    | ) | 2.5   |   |             |   | 262.1    |  
|                                                  |               |   |            |   |                |   |                       |   |          |   |          |   |       |   |              |   |          |  
|



|108 | United
    Utilities Annual Report & Accounts 2006
|--- | --------------------------------------------------

---



Back to Contents

| |  |                         
| |  | ------------------------
| |  | Financial
    statements
| |  |                         
| |  |                         

| |  |  | 
| |  |  | 
| |  |  | 
| |  |  | 



33 Summary of differences between International Financial Reporting Standards and accounting principles generally accepted in the United States of
America

The
  groups consolidated financial statements are prepared in accordance with
  International Financial Reporting Standards (IFRS) as adopted in the European
  Union, which differ in certain respects from accounting principles generally
  accepted in the United States of America (US GAAP). Reconciliations of profit
  after taxation (or net income) and total equity and the groups financial
  position under IFRS and those under US GAAP are set out below.

Effect
on net income of differences between IFRS and US GAAP

|                                                      |      |  | 2006  |   | 2005  |  
|----------------------------------------------------- | ---- |  | ----- | - | ----- | -
|For the year ended 31 March                           | Note |  | £m    |   | £m    |  
|                                                      |      |  |       |   |       |  
|Net income in accordance with IFRS                    |      |  | 208.2 |   | 262.1 |  
|Profit attributable to minority interest              |      |  | (0.3  | ) | (1.8  | )
|US GAAP adjustments:                                  |      |  |       |   |       |  
| Pensions                                            | (a)  |  | (55.1 | ) | (5.3  | )
| Infrastructure assets                               | (b)  |  |      |   | 11.2  |  
| Provisions                                          | (c)  |  | 5.8   |   | (5.2  | )
| Capitalisation of interest                          | (d)  |  | 46.3  |   | 85.4  |  
| Amortisation of capitalised interest                | (d)  |  | (14.4 | ) | (13.5 | )
| (Loss)/gain on sale of business                     | (e)  |  | (0.3  | ) | 1.0   |  
| Impairment of long-lived assets other than goodwill | (f)  |  | (16.6 | ) | (2.6  | )
| Derivatives and hedging activities                  | (g)  |  | 32.6  |   | (69.1 | )
| Share-based compensation                            | (h)  |  | (7.2  | ) | (9.4  | )
| Revenue and related profit recognition              | (i)  |  | (14.6 | ) | (7.0  | )
| Business combinations and goodwill                  | (j)  |  | (6.6  | ) | (0.6  | )
| Deferred taxes                                      | (k)  |  |      |   | (0.7  | )
| Tax effect of US GAAP adjustments                   | (k)  |  | (2.7  | ) | 6.2   |  
|                                                      |      |  |       |   |       |  
|Net income in accordance with US GAAP                 |      |  | 175.1 |   | 250.7 |  
|                                                      |      |  |       |   |       |  
|                                                      |      |  |       |   |       |  
|Net income per £1 ordinary share in accordance        |      |  |       |   |       |  
|with US GAAP basic method (pence)                     | (m)  |  | 20.5  |   | 32.1  |  
|Net income per £1 ordinary share in accordance        |      |  |       |   |       |  
|with US GAAP diluted method (pence)                   | (m)  |  | 20.4  |   | 29.0  |  
|                                                      |      |  |       |   |       |  
|

Cumulative
effect on shareholders equity of differences between IFRS and US GAAP

|                                                      |      |  | 2006    |   | 2005    |  
|----------------------------------------------------- | ---- |  | ------- | - | ------- | -
|At 31 March                                           | Note |  | £m      |   | £m      |  
|                                                      |      |  |         |   |         |  
|Total equity in accordance with IFRS                  |      |  | 2,630.9 |   | 2,144.4 |  
|Minority interests                                    |      |  | (1.7    | ) | (1.3    | )
|US GAAP adjustments:                                  |      |  |         |   |         |  
| Pensions                                            | (a)  |  | 252.9   |   | 263.3   |  
| Infrastructure assets                               | (b)  |  | (258.8  | ) | (258.8  | )
| Provisions                                          | (c)  |  | 5.8     |   | (26.1   | )
| Capitalisation of interest                          | (d)  |  | 719.4   |   | 673.1   |  
| Amortisation of capitalised interest                | (d)  |  | (102.3  | ) | (87.9   | )
| Impairment of long-lived assets other than goodwill | (f)  |  | 0.9     |   | 17.4    |  
| Derivatives and hedging activities                  | (g)  |  | (31.0   | ) | (40.9   | )
| Share-based compensation                            | (h)  |  | 1.2     |   |        |  
| Revenue and related profit recognition              | (i)  |  | (61.8   | ) | (51.6   | )
| Business combinations and goodwill                  | (j)  |  | 908.0   |   | 914.6   |  
| Deferred taxes                                      | (k)  |  |        |   |        |  
| Tax effect of US GAAP adjustments                   | (k)  |  | (151.4  | ) | (141.7  | )
|                                                      |      |  |         |   |         |  
|Shareholders equity in accordance with US GAAP       |      |  | 3,912.1 |   | 3,404.5 |  
|                                                      |      |  |         |   |         |  



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          Utilities Annual Report & Accounts 2006 | 109
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|Notes
      to the consolidated financial statements continued
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33 Summary of differences between International Financial Reporting Standards and accounting principles generally accepted in the United States of Americacontinued

(a) PensionsUnder
  IFRS, defined benefit plan assets are measured at fair value while liabilities
  are measured at present value. The difference between the two amounts is recognised
  as an asset or liability in the balance sheet. The cost of providing pension
  benefits to employees relating to the current years service is included
  in the income statement within employee benefits, whilst the difference between
  the expected return on scheme assets and interest on scheme liabilities is included
  within employee benefits.

Upon
  the adoption of IFRS, the group elected to recognise all cumulative actuarial
  gains and losses at the date of transition. Under US GAAP, the group did not
  have the option to recognise all cumulative actuarial gains or losses; therefore,
  at the date of transition and in future periods, this difference in timing causes
  differences between IFRS and US GAAP. Under IFRS, all future actuarial gains
  and losses are also recognised in full outside the income statement in retained
  earnings and presented in the statement of recognised income and expense. US
  GAAP does not permit recognition of all actuarial gains and losses in a statement
  other than the primary income statement. As permitted by US GAAP, the group
  uses the corridor method, whereby actuarial gains and losses in excess of ten
  per cent of the greater of the market related value of plan assets and the projected
  benefit obligation at the beginning of each year, are recognised in the income
  statement over the remaining service lives of current employees.

Under
  US GAAP, where the value of benefits accrued based on employee service up to
  the balance sheet date (the accumulated benefit obligation) exceeds the fair
  value of plan assets, an additional minimum pension liability is recognised
  to the extent that the excess is greater than any accrual already established
  for unfunded pension costs. The corresponding entry is recorded as an intangible
  asset to the extent of unrecognised prior service cost with any remaining balance
  recognised in other comprehensive income, a component of shareholders
  equity.

US
  GAAP also allows the group to recognise prior service costs over the remaining
  service life of the active plan participants, even if the benefits are already
  fully vested. Under IFRS, these costs are recognised immediately if they are
  already vested or on a straight-line basis until the additional benefits are
  vested. As a result, under IFRS, certain variations would be recognised earlier
  than under US GAAP.

Under
  IFRS, the group has recognised a pre-paid pension cost of £19.3 million
  as at 31 March 2006 (liability of £84.6 million as at 31 March 2005).
  Under US GAAP, the group has recognised a pension prepayment of £272.2
  million (£178.7 million as at 31 March 2005) of which £3.4 million
  has been recorded within accumulated other comprehensive income as at 31 March
  2006 (£172.0 million as at 31 March 2005). £nil has been recorded
  as an intangible asset as at 31 March 2006 (£nil as at 31 March 2005).

In
  the year ended 31 March 2006, the group disposed of Your Communications under
  IFRS. £4.7 million was reclassified in the income statement from pensions
  to loss on sale of a business relating to previously unrecognised losses.

(b) Infrastructure assetsUpon
  adoption of IFRS, a deemed cost has been established as at the date of transition,
  1 April 2004, by reference to the estimated fair value of the infrastructure
  assets at that date. Subsequent expenditure on the infrastructure assets relating
  to increases in capacity or enhancements of the network are treated as additions.
  Amounts incurred in maintaining the operating capability of the network in accordance
  with defined standards of service are expensed in the year in which the expenditure
  is incurred. Enhancement expenditure forming part of the groups planned
  maintenance activities represents a small part of the total segments and therefore
  is viewed as servicing the infrastructure network and is expensed as incurred
  in accordance with IAS 16 Property, Plant and Equipment.

Under
  US GAAP, infrastructure assets are recorded at depreciated historical cost and
  accumulated depreciation recorded was £256.3 million as at 31 March 2006
  and 31 March 2005. Prior to 1 April 2005, enhancement expenditure that formed
  part of the groups planned maintenance activities was capitalised and
  depreciated over its estimated useful life. In conjunction with the revision
  and extension of some assets lives, this expenditure has been reassessed such
  that a larger proportion is now viewed as servicing the infrastructure network
  and expensed as incurred. This has been accounted for as a change in accounting
  principle that is inseparable from the effect of a change in accounting estimate.
  With effect from 1 April 2005, the treatment under US GAAP is consistent with
  IFRS although a £2.5 million difference remains as a result of the difference
  in the carrying value of the infrastructure assets at the IFRS transition date
  and the different accounting treatments between IFRS and US GAAP during the
  year ended 31 March 2005. The effect of depreciating previously capitalised
  enhancement expenditure is to increase the depreciation charge for the year
  by £1.3 million.

Under
  IFRS, infrastructure assets are depreciated by writing off their deemed cost,
  as determined by reference to the fair value at 1 April 2004 on the groups
  transition to IFRS in accordance with IFRS 1 First-time Adoption of International
  Financial Reporting Standards, less their estimated residual value using
  the straight-line method over their useful lives. As part of the transition
  to IFRS, the group undertook a review of the useful lives of the segments of
  the infrastructure network, with the assistance of external consultants. The
  lives allocated to the segments range from 15 to 300 years and have been applied
  to the deemed cost from 1 April 2004, the date of transition to IFRS.

Under
  US GAAP, for periods ended on or prior to 31 March 2005, infrastructure assets
  were accounted for as a single component and were recorded at cost and depreciated
  using the straight-line method over the estimated useful economic life, which
  was estimated at 100 years. With effect from 1 April 2005, the infrastructure
  assets have been segmented on a consistent basis with that adopted under IFRS
  and the same useful lives adopted. These changes in estimate have been applied
  prospectively from 1 April 2005 in accordance with APB Opinion 20. The effect
  of these changes was to reduce the depreciation charge for the year ended 31
  March 2006 by £1.3 million.

(c) Provisions and liabilitiesProvision
  accounting under IFRS is similar to US GAAP, except as follows:

| | Under
       IFRS, restructuring charges are provided in full, from the date of commitment
       to the plan, including employee termination benefits, property exit costs,
       equipment write downs and other restructuring related costs. Under US
       GAAP, different requirements apply such that certain restructuring charges
       are recognised in later accounting periods compared with IFRS. In the
       year ended 31 March 2006, the
group recognised £1.3 million relating to restructuring provisions (2005: £nil
recognised under US GAAP) which were not recognised under US GAAP.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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        Utilities Annual Report & Accounts 2006
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33
  Summary of differences between International Financial Reporting Standards and
  accounting principles generally accepted in the United States of Americacontinued

| | The
       group has recognised provisions for contracts where the unavoidable costs
       of meeting the obligations under the contract exceed the economic benefits
       expected to be received. Under IFRS, certain liabilities have been recognised
       earlier than they would be under US GAAP as the group has not met the cease-use date requirements of US GAAP. Hence, provisions for these types of contract are
£4.5 million lower under US GAAP in the year ended 31 March 2006 (2005: £nil).                                                                                              
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Under US GAAP, a liability is considered extinguished only when the debtor pays the creditor and is relieved of all of its obligations with respect to the debt,
or the debtor is legally released as a primary obligor under the debt, either judicially or by the creditor. In the year ended31
March 2005, under US GAAP the group
recognised a liability of £26.1 million relating to items where the liability had not been legally extinguished. In the year ended 31 March 2006, upon the groups
adoption of IAS 39, this liability was also recognised under IFRS and the amount
was released to equity.

(d)
Capitalisation of interestUnder
  IFRS, the group elected to not capitalise interest and expense interest charges
  to the income statement in the year in which they are incurred. Under US GAAP,
  interest charges on funds invested in the construction of qualifying assets
  during the time required to prepare them for their intended use are capitalised
  and amortised over the life of the respective assets.

(e)
(Loss)/gain on sale of businessDifferences
  between the gain or loss recognised on the disposal of a business recognised
  under IFRS and that recognised under US GAAP arise principally because of differences
  in the carrying values of the assets and liabilities of the business. In addition,
  differences in the gain or loss may arise if the business was previously acquired,
  due to differences in the carrying amount of goodwill recognised in respect
  of that operation (see Business Combinations below) and/or, if the
  business is a foreign operation, due to differences in the cumulative currency
  translation differences that are recycled to the income statement on disposal
of the business.

(f) Impairment of long-lived assets other than goodwillUnder
  IFRS, long-lived assets are assessed for impairment under IAS 36 Impairment
  of Assets, for each cash-generating unit at each reporting date by considering
  whether there are any indications that an asset may be impaired. Goodwill is
  tested at least annually for impairment. Long-lived assets are tested for impairment,
  if there is such an indication of impairment, by comparing the carrying value
  of the cash-generating unit with its recoverable amount, which is determined
  by reference to the estimated discounted cashflows to be generated from its
  use or its fair value less costs to sell with the exception of goodwill. If
  the events or circumstances that triggered the impairment no longer exist, the
  impairment is reversed in subsequent periods.

Under
  US GAAP, long-lived assets, other than goodwill and intangible assets with an
  indefinite life, are assessed for impairment under SFAS 144 Accounting
  for the Impairment or Disposal of Long-Lived Assets. Goodwill is assessed
  for impairment under SFAS 142 Goodwill and Other Intangible Assets
  as discussed below. Under SFAS 144, assets are assessed for impairment whenever
  events or circumstances indicate that an asset may not be recoverable by comparing
  the carrying value of the asset with the estimated undiscounted cashflows to
  be generated by the asset. If this test indicates a deficit, any impairment
  is calculated by comparing the carrying value of the asset with its fair value,
  which is usually determined by reference to estimated discounted cashflows.
  Under US GAAP, the restoration of a previously recognised impairment loss is
  not permitted.

Under
  US GAAP impairment reviews of goodwill are carried out at the reporting unit
  level, which are subdivisions of the groups reporting segments. The reporting
  units may be at a higher level than the cash-generating units assessed for impairment
  under IFRS. Under US GAAP, goodwill must be tested for impairment on an annual
  basis or on an interim basis if an event occurs or circumstances change that
  would reduce the fair value of a reporting unit to a value below its carrying
  value. The goodwill test for impairment consists of a two-step process that
  begins with an estimation of the fair value of a reporting unit. The first step
  is a screen for potential impairment and the second step measures the impairment,
  if any, by determining the implied fair value of goodwill. The implied fair
  value of goodwill is determined by allocating the fair value to the assets and
  liabilities of the reporting units, including any unrecognised intangible assets,
  in a hypothetical purchase price allocation.

In
  accordance with IAS 36, the group performed an impairment review on certain
  long-lived assets within its infrastructure management business in the year
  ended 31 March 2005. This resulted in an impairment of tangible assets of £1.7
  million. Under US GAAP, there was no indication of impairment of the tangible
  assets on an undiscounted cashflow basis in accordance with SFAS 144. Under
  IFRS, a previously recognised impairment of £0.7 million was reversed
  in the year ended 31 March 2005. Under US GAAP, this impairment may not be reversed.

The
  group also performed an impairment review within its telecommunications business
  in the year ended 31 March 2003. This resulted in an exceptional adjustment
  to value of £25.5 million representing tangible assets of £14.6
  million, definite-lived intangible assets of £8.6 million and goodwill
  of £2.3 million. Under US GAAP, there was no indication of impairment
  of tangible or definite-lived intangible assets in the telecommunications business
  on an undiscounted cashflow basis in accordance with SFAS 144. In addition,
  no impairment of telecommunications goodwill under SFAS 142 was required. In
  the year ended 31 March 2006, the group performed an impairment review both
  under US GAAP and IFRS. As a result of higher carrying values of certain assets
  under US GAAP, the impairment recorded in the year ended 31 March 2006 was higher
  than that recorded under IFRS by £24.0 million.

(g) Derivatives and hedging activitiesUnder
  IFRS, the group adopted IAS 32 Financial Instruments: Disclosure and Presentation,
  and IAS 39 Financial Instruments: Recognition and Measurement, on
  1 April 2005 with no retrospective application. IAS 39 requires that all derivative
  instruments are recognised as assets or liabilities on the balance sheet and
  measured at fair value, regardless of the purpose or intent in holding them.
  Changes in the fair value of derivative instruments are recognised periodically
  either in earnings or shareholders equity, depending upon whether the
  derivative is designated as a hedge of changes in fair value or cashflows. For
  derivatives designated as fair value hedges, changes in fair value of the hedged
  item attributable to the risk being hedged are recorded in the income statement.
  Changes in the fair value of derivatives that are designated and effective as
  hedges of future cashflows are recognised directly in equity and recycled into
  the income statement when the hedged item is recognised in earnings. The ineffective
  portion of the fair value changes are recognised in earnings immediately.

Under
  IFRS, certain financial liabilities are designated at fair value through the
  income statement where the designation eliminates or significantly reduces a
  measurement or recognition inconsistency that would otherwise arise from measuring
  financial instruments or recognising the gains and losses on them on different
  bases. In the year ended 31 March 2006, the group recorded gains of £26.8
  million in the income statement in respect of such items.



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          Utilities Annual Report & Accounts 2006 | 111
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| | Financial
      statements | 
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|                                                               |  |  | 
|-------------------------------------------------------------- |  |  | 
|Notes
      to the consolidated financial statements continued
|                                                               |  |  | 

33
       Summary of differences between International Financial Reporting Standards
      and
  accounting principles generally accepted in the United States of Americacontinued

For
     the year ended 31 March 2005, the group did not recognise derivatives at fair

  value on the balance sheet nor were mark-to-market amounts recorded in net
    income.  Interest differentials on derivative instruments were charged to the
    income
    statement as interest costs in the period in which they were realised. Changes
     in the market value of futures trading contracts were reflected in the income

  statement in the period in which the change occurred. Monetary assets and liabilities
     denominated in foreign currencies that are hedged by a foreign currency derivative

  were translated using the contract rate in the hedging derivative.

Under
  US GAAP, the group adopted SFAS 133 Accounting for derivative instruments
  and hedging activities on 1 April 2002. SFAS 133 also requires that all derivative
  instruments are recognised as assets or liabilities on the balance sheet and
  measured at fair value, regardless of the purpose or intent in holding them.
  The group currently does not designate any of its derivative instruments as
  hedges under SFAS 133. As a result, under US GAAP, all derivative contracts
  have been recorded in the balance sheet at fair value at the year end with changes
  in fair value recorded in earnings. In the year ended 31 March 2006, £20.0
  million was recorded in earnings.

In accordance
  with the transition provisions of SFAS 133, the group recorded, at 1 April 2001,
  a net-of-tax cumulative-effect reduction of £88.1 million in accumulated
  other comprehensive income within shareholders equity to recognise at
  fair value all derivatives that were previously designated as cashflow type
  hedging instruments. Of the transition adjustment of £88.1 million in
  accumulated comprehensive income, £84.4 million has been reclassified
  into earnings at 31 March 2006 (£79.2 million at 31 March 2005).

Additionally,
  a fair value adjustment recognised in accordance with the transition provisions
  of SFAS 133 increased debt by £163.0 million, which was offset by a corresponding
  amount to record derivatives previously designated as fair value type hedging
  instruments. The fair value adjustment to debt is being amortised over the period
  of the debt in accordance with transitional rules. In the year ended 31 March
  2006, amortisation of £17.7 million (2005: £23.2 million) was recognised
  under US GAAP.

US GAAP
  does not permit financial liabilities to be designated at fair value through
  the income statement. Instead, such liabilities are recorded at amortised cost.

(h)
  Share-based compensationUnder IFRS,
  equity-settled share-based compensation is measured at fair value at the date
  of grant. The fair value determined at the grant date is expensed on a straight-line
  basis over the vesting period, based on estimates of the number of options that
  are expected to vest. The group applied IFRS 2 retrospectively to all awards
  that were outstanding but had not vested as at 1 April 2004, except for those
  equity-settled awards that were granted on or before 7 November 2002.

Under
  US GAAP, the group accounts for stock issued to employees in accordance with
  Accounting Principles Board Opinion No. 25 Accounting for Stock Issued
  to Employees (APB 25). Under APB 25, options granted under
  the UK ShareSave scheme are treated as compensatory. Also, under APB 25, the
  executive share option scheme and the performance share plan have been treated
  as variable plans due to performance conditions attached to the plans. Accordingly,
  compensation expense has been recognised under US GAAP for the Sharesave scheme,
  the executive share option scheme and the performance share plan. For all options
  that include performance-related criteria the cost is calculated as the difference
  between the option price and the market price at the end of the reporting period.
  In respect of the Sharesave scheme, the cost is calculated as the difference
  between the option price and the market price at date of grant. The cost is
  amortised over the period from the date the options are granted to the date
  they are first exercisable, that is, the vesting date.

In the
  year ended 31 March 2006, £13.5 million was recognised in earnings under
  US GAAP as compensation expense (2005: £9.4 million).

IFRS
  2 Share-based Payment does not specifically address the accounting
  for payroll taxes such as UK National Insurance relating to share-based payments.
  However, payroll taxes relating to share-based payments are accrued pro-rata
  over the option performance period based on the intrinsic value at each reporting
  date. Under US GAAP, EITF 00-16 Recognition and measurement of employer
  payroll taxes on employee stock-based compensation a liability for payroll
  taxes is not recognised until the option is exercised. In the year ended 31
  March 2006, £1.2 million was recognised under IFRS which was not recognised
  under US GAAP (2005: £nil).

(i)
  Revenue and related profit recognitionThe revenue
  recognition adjustment principally relates to revenues under long-term service
  contracts in the groups Vertex outsourcing business and relates to the
  recognition of up-front fees and the treatment of planned reductions in fees
  over the terms of such contract. Under IFRS, revenues under such contracts are
  generally recognised using the percentage completion method and applying a cost-to-cost
  methodology. Application of a cost-to-cost methodology is explicitly permitted
  by IAS 18 Revenue, for long-term service contracts. Furthermore,
  IAS 18 emphasises matching of revenues and expenses. As a result, under IFRS,
  non-refundable set-up fees received from clients as a contribution to transition
  costs incurred at the commencement of a contract are recognised as the transition
  costs are incurred, with any excess recognised as revenues over the period of
  the contract in line with forecast activity levels. Planned reductions in fees
  related to anticipated reductions in costs are recognised as billed since the
  billing profile reflects the projected cost profile over the term of the contract.
  In the year ended 31 March 2006, revenue of £5.9 million was deferred
  under US GAAP (2005: £2.3 million) relating to non-refundable set-up fees.

Under
  US GAAP, revenues under long-term service contracts must be recognised based
  upon proportional performance under the contract. This is similar to the percentage
  completion method; however, use of a cost-to-cost methodology for determining
  proportional performance under service contracts is not considered acceptable.
  Instead emphasis is placed on the customers perspective under the contract.
  Since the customer does not place any separate value upon the set-up of the
  contract any up-front fees are recognised over the longer of the expected term
  of the customer relationship and the contractual term. Furthermore, since the
  service received by the customer is similar throughout the term of the agreement,
  planned reductions in fees are recognised on a straight-line basis over the
  contractual term. Under US GAAP the group has also elected to expense transition
  costs as incurred. In the year ended 31 March 2006, revenue under US GAAP was
  reduced by £9.6 million (2005: £3.5 million) relating to long-term
  service contracts.

Under
  IFRS, a provision is required to be recognised for a contract where the unavoidable
  costs of meeting the obligations under the contract exceed the benefits expected
  to be received. The provision is measured at the value of the net obligations
  and is recorded within operating expenses. Under US GAAP, such a provision is
  not necessary due to the different revenue recognition policies. In the year
  ended 31 March 2006, the group recognised £3.3 million under IFRS relating
  to provision for contract losses which were not required to be recognised under
  US GAAP (2005: £2.4 million).



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| |  | Financial
      statements
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33
       Summary of differences between International Financial Reporting Standards
      and
accounting principles generally accepted in the United States of Americacontinued

(j)
     Business combinations and goodwillUnder both
    IFRS and US GAAP, the group uses the purchase method of accounting for business
    combinations. Under the purchase method, the acquiring entity allocates consideration
    for the transaction to the assets acquired and liabilities assumed based on
    their estimated fair values at the date of acquisition with the difference treated
  as goodwill.

In accordance
  with IFRS 1, all business combinations prior to 1 April 1999 have been accounted
  for in accordance with UK GAAP applicable at the date of acquisition. Purchased
  goodwill arising on consolidation in respect of acquisitions before 1 April
  1999 was, and remains, written off to reserves in the year of acquisition. Goodwill
  written off to reserves prior to 1998 is not included in determining any subsequent
  profit or loss on disposal. In the year ended 31 March 2006, £9.4 million
  has been de-recognised from goodwill under US GAAP and recognised in earnings
  due to the impairment of Your Communications.

Under
  IFRS, the group recognises as a cost of the acquisition the fair value of contingent
  consideration payable where it is probable that it will be paid and it can be
  reliably measured. Under US GAAP, the group does not recognise contingent consideration
  until the contingency is resolved or the amount is determinable. In the year
  ended 31 March 2006, the group recognised £13.5 million (2005: £nil)
  relating to contingent consideration under IFRS that has not been recognised
  under US GAAP.

Under
  IFRS restructuring provisions are recognised as part of the acquired liabilities
  only when the liability, recognised in accordance with IAS 37 Provisions,
  Contingent Liabilities and Contingent Assets, existed at the acquisition
  date. Under US GAAP, restructuring provisions can be recognised as part of the
  acquired liabilities if management has assessed and formulated a plan to exit
  an activity of the acquired entity, and has communicated the termination or
  relocation arrangements to employees of the acquired entity as soon as possible
  after the consummation date. The group included an additional £2.8 million
  within the acquired liabilities of Marlborough Stirling to calculate the value
  of goodwill under US GAAP. Please refer to note 24 for further information on
  the acquisition of Marlborough Stirling.

(k)
  Deferred taxesThe
  fundamental basis of recognising deferred taxes is similar under both IFRS and
  US GAAP; however, certain detailed differences exist. Under IFRS, deferred tax
  assets for share-based compensation are calculated based on the intrinsic value
  of the outstanding awards, whereas under US GAAP it is based on the recorded
  compensation expense. Furthermore, because of the differences in the carrying
  value of assets and liabilities under IFRS and US GAAP, the company has recorded
  a deferred tax effect for the other adjustments between IFRS and US GAAP described
  herein.

(l)
  Classification differences between IFRS and US GAAPIn addition
  to the differences between IFRS and US GAAP related to the recognition and measurement
  of transactions by the group, there are also a number of differences in the
  manner in which items are classified in the consolidated income statement and
  consolidated balance sheet. These classification differences have no impact
  on net income or shareholders equity.

Proportionate
  consolidationThe group
  consolidates its interest in a jointly controlled entity using proportionate
  consolidation in accordance with IAS 31 Interests in Joint Ventures.
  Under US GAAP, these entities are accounted for under the equity method in accordance
  with APB Opinion No.18. A summarised balance sheet and income statement relating
  to the groups pro-rata share of these entities is presented in note 13.
  In accordance with IFRS, a summarised cashflow statement relating to the groups
  pro-rata share of these entities is presented below:

|                                             | 31
      March 2006 |   | 31
      March 2005 |  
|-------------------------------------------- | ------------------- | - | ------------------- | -
|Cashflow
      statement data                | £m                  |   | £m                  |  
|                                             |                     |   |                     |  
|Cash
      inflow from operating activities  | 44.6                |   | 31.2                |  
|Cash
      outflow from investing activities | (26.5               | ) | (30.9               | )
|Cash
      inflow from financing activities  | 21.6                |   | 19.4                |  
|                                             |                     |   |                     |  

Construction
  contractsUnder IFRS,
  amounts due to and from customers, in relation to construction contracts, are
  shown separately as debtors or creditors. Under US GAAP, unbilled debt, cost
  accruals, work in progress and deferred income are classified as separate balances.
  At 31 March 2006, £12.5 million was classified as unbilled debt, £nil
  as a cost accrual, £11.2 million as work in progress and £1.3 million
  as deferred income (2005: £20.5 million unbilled debt, £nil cost
  accrual, £19.2 million work in progress and £1.3 million deferred
  income).

Disposal
  of Your CommunicationsThe group
  has classified the operations of Your Communications as discontinued under IFRS
  5 Non-current Assets held for Sale and Discontinued Operations,
  as described in note 7. This requires that the group separately classify the
  results and profits or losses on disposal of operations as discontinued operations.
  Operations not satisfying all these conditions are classified as continuing.
  Under US GAAP, SFAS 144 Accounting for the impairment or disposal of long-lived
  assets, Your Communications does not meet the criteria for classification
  as a discontinued operation because the equity method investment in THUS Group
  plc is deemed to meet the definition of a continuing involvement in the operations
  of Your Communications. Therefore, under US GAAP, the operations of Your Communications
  are included in the groups continuing operations and the loss on disposal
  is reported as part of the profit from continuing operations. Note 1 discloses
  summarised income statement information for Your Communications for the period
  until its disposal.

Debt
  issuance costsUnder
  IFRS, the issuance costs of bank loans are offset against the proceeds received.
  Under US GAAP, debt issuance costs are recorded as a separate asset in the balance
  sheet. There is no difference in the amortisation of debt issuance costs. As
  at 31 March 2006, the unamortised issuance costs offset against bank loans was
  £12.1 million (2005: £13.1 million).



|United
        Utilities Annual Report & Accounts 2006 | 113
|------------------------------------------------------ | ---

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| |                            | 
| | -------------------------- | 
| | Financial
      statements | 
| |                            | 
| |                            | 

|                                                               |  |  | 
|-------------------------------------------------------------- |  |  | 
|Notes
      to the consolidated financial statements continued
|                                                               |  |  | 

33
       Summary of differences between International Financial Reporting Standards
      and
accounting principles generally accepted in the United States of Americacontinued

(m)
     Earnings per share (EPS)Under IFRS,
    basic EPS is based on the weighted average number of ordinary shares in issue
    during the year. EPS is the profit in pence attributable to each equity ordinary
    share, based on the profit for the financial year attributable to ordinary shareholders
    divided by the weighted average number of ordinary shares in issue during the
    year and ranking for dividend in respect of the period. This method is also
  used for basic EPS under US GAAP.

Under IFRS and US GAAP, diluted EPS must be disclosed. This is based on net income and computed using the weighted average number of shares in issue during the year and the
dilutive effect of all share options and ordinary share equivalents. This method is similar to the treasury stock method used to calculate diluted EPS for US GAAP purposes.

Earnings per share computed in accordance with US GAAP has been based on the following number of shares:

|                                                                                               | 2006    |  | 2005    |  
|---------------------------------------------------------------------------------------------- | ------- |  | ------- | -
|                                                                                               | million |  | million |  
|                                                                                               |         |  |         |  
|Weighted
      average number of ordinary shares under US GAAP  basic EPS                     | 853.9   |  | 781.0   |  
|Common
      stock equivalents  dilutive share options                                        | 4.5     |  | 5.9     |  
|Number
      of A shares to be issued in 2005 (ordinary share equivalent)                      |        |  | 169.6   |  
|Number
      of A shares that would have been issued at fair value (ordinary share equivalent) |        |  | (91.3   | )
|                                                                                               |         |  |         |  
|Weighted
      average number of ordinary shares under US GAAP  diluted EPS                   | 858.4   |  | 865.2   |  
|                                                                                               |         |  |         |  

As described
  in note 9 of the consolidated financial statements, earnings per share has been
  retroactively adjusted for all periods prior to the rights issue to reflect
  the bonus element of the rights issue, as required by IAS 33 Earnings
  Per Share under IFRS. The same adjustments are required under US GAAP.

(n)
  Provision for doubtful receivables

|                                         | Balance            |  |           |     |              |     | Balance         | 
|---------------------------------------- | ------------------ |  | --------- | --- | ------------ | --- | --------------- | 
|                                         | at
      beginning |  | Additions |     | Utilisations |     | at
      end    | 
|                                         | of
      period    |  | note      | (a) | note         | (b) | of
      period | 
|                                         | £m                 |  | £m        |     | £m           |     | £m              | 
|                                         |                    |  |           |     |              |     |                 | 
|For
      the year ended 31 March 2006   |                    |  |           |     |              |     |                 | 
|Provision
      for doubtful receivables | 127.2              |  | 80.0      |     | (51.6        | )   | 155.6           | 
|                                         |                    |  |           |     |              |     |                 | 
|For
      the year ended 31 March 2005   |                    |  |           |     |              |     |                 | 
|Provision
      for doubtful receivables | 107.8              |  | 40.8      |     | (21.4        | )   | 127.2           | 
|                                         |                    |  |           |     |              |     |                 | 

|Notes:
|------
|      
|(a)   
|(b)   

(o)
  New US accounting standards and pronouncements not yet effectiveFASB
  Statement No. 123 Revised (SFAS 123R) Share-based payment,
  issued in December 2004, requires compensation costs related to share-based
  payment transactions to be recognised in the financial statements. Previously,
  a choice existed under US GAAP to account for these transactions either under
  APB 25 Accounting for stock issued to employees, or SFAS 123 Share-based
  payment. This accounting standard is applicable for accounting periods
  beginning after 15 December 2005 and will be adopted by the group from 1 April
  2006. Adoption of SFAS 123R is not expected to have a material impact on the
  consolidated financial position, results of operations or cashflows.

FASB
  Interpretation No.47 (FIN 47) Accounting for conditional asset
  retirement obligations, issued in March 2005, clarifies the term conditional
  asset retirement obligation as used in FASB Statement No.143 (SFAS
  143) Accounting for asset retirement obligations and when
  an entity would have sufficient information to reasonably estimate the fair
  value of an asset retirement obligation. This interpretation was effective as
  of 1 April 2005. The group has concluded that this standard has no impact in
  the year ended 31 March 2006.



|114 | United Utilities Annual Report & Accounts 2006
|--- | ----------------------------------------------

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| |  |                             
| |  | ----------------------------
| |  | Information for shareholders
| |  |                             
| |  |                             

|                                         |  |  | 
|---------------------------------------- |  |  | 
|Selected
    consolidated financial data |  |  | 
|                                         |  |  | 



The
  selected financial data set out below were extracted or derived from the consolidated
  financial statements. The selected financial data should be read in conjunction
  with, and are qualified in their entirety by reference to, the consolidated
  financial statements and their accompanying notes. The selected financial data
  for the years ended 31 March 2006 and 2005 and as of 31 March 2006 and 2005
  are extracted from the groups 2006 consolidated financial statements and
  related notes included herein. The selected financial under US GAAP, as of 31
  March 2004, 2003 and 2002 and the years then ended have been extracted from
  historical consolidated financial statements not separately presented herein.

Following a regulation adopted by the European Parliament, the consolidated financial
statements have for the first time been prepared in accordance with International
Financial Reporting Standards (IFRS), as issued by the International Accounting
Standards Board and adopted by the European Union. As permitted by first-time
application of IFRS, only two years of IFRS are presented in this report. An
explanation of changes in accounting policies on adoption of IFRS, and reconciliations
of net income and equity for the 2005 financial year from previously applied
UK GAAP to IFRS, are included in note 32 to the consolidated financial statements.

United Utilities prepares its consolidated financial statements in accordance
with IFRS, which differs in certain respects from US GAAP. Included in note 33
to the consolidated financial statements are reconciliations of profit after
taxation (or net income)
and total equity and the groups financial position under IFRS and those
under US GAAP.

The financial information presented in US dollars is presented solely for the
convenience of the reader and is translated from sterling to US dollars at the
noon buying rate on 31 March 2006 of 1.74. Such translation should not be construed
as a representation that the sterling amounts actually represent US dollar amounts
or could have been converted in US dollars at the rate indicated or at any other
rate.

Amounts in accordance with IFRS

|                                                                                                  | 2006                                                                    |   | 2006     |   | 2005     |  
|------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | - | -------- | - | -------- | -
|                                                                                                  | $                                                                       |   | £        |   | £        |  
|                                                                                                  |                                                                         |   |          |   |          |  
|Financial
      year ended 31 March                                                               | (in
      millions, except for information given per share and per ADS) |  
|                                                                                                  |                                                                         |   |          |   |          |  
|Consolidated
      income statement data:                                                         |                                                                         |   |          |   |          |  
|Continuing
      operations                                                                       |                                                                         |   |          |   |          |  
|Revenue                                                                                           | 4,153.0                                                                 |   | 2,386.8  |   | 2,103.7  |  
|Total
      operating expenses(1)                                                                 | (2,865.4                                                                | ) | (1,646.8 | ) | (1,452.3 | )
|                                                                                                  |                                                                         |   |          |   |          |  
|Operating
      profit                                                                            | 1,287.6                                                                 |   | 740.0    |   | 651.4    |  
|Investment
      income                                                                           | 94.0                                                                    |   | 54.0     |   | 38.3     |  
|Finance
      expense                                                                             | (617.2                                                                  | ) | (354.7   | ) | (322.1   | )
|                                                                                                  |                                                                         |   |          |   |          |  
|Profit
      before taxation                                                                      | 764.4                                                                   |   | 439.3    |   | 367.6    |  
|Taxation                                                                                          | (209.3                                                                  | ) | (120.3   | ) | (96.1    | )
|                                                                                                  |                                                                         |   |          |   |          |  
|Profit
      for the year from continuing operations                                              | 555.1                                                                   |   | 319.0    |   | 271.5    |  
|                                                                                                  |                                                                         |   |          |   |          |  
|Discontinued
      operation(2)                                                                   |                                                                         |   |          |   |          |  
|Loss
      for the period/year from discontinued operation                                        | (192.8                                                                  | ) | (110.8   | ) | (9.4     | )
|Minority
      interest                                                                           | (0.5                                                                    | ) | (0.3     | ) | (1.8     | )
|                                                                                                  |                                                                         |   |          |   |          |  
|Profit
      after tax and minority interests                                                     | 361.8                                                                   |   | 207.9    |   | 260.3    |  
|                                                                                                  |                                                                         |   |          |   |          |  
|Basic
      earnings per share(8)                                                                 | 42.3                                                                    |   | 24.3     | p | 33.3     | p
|Diluted
      earnings per share(8)                                                               | 42.1                                                                    |   | 24.2     | p | 30.1     | p
|Dividend
      per ordinary share (2005 re-presented)                                             | 76.4                                                                    |   | 43.87    | p | 42.43    | p
|Dividend
      per ADS(4)                                                                         | 152.7                                                                   |   | 87.76    | p | 84.86    | p
|                                                                                                  |                                                                         |   |          |   |          |  
|Average
      number of ordinary sharesin
      issue  basic (million) (2005 re-presented)(8)    | 853.9                                                                   |   | 853.9    |   | 781.0    |  
|Average
      number of ordinary shares in
      issue  diluted (million) (2005 re-presented)(8) | 858.4                                                                   |   | 858.4    |   | 865.2    |  
|                                                                                                  |                                                                         |   |          |   |          |  

|                                       |           |   |          |   |          |  
|-------------------------------------- | --------- | - | -------- | - | -------- | -
|                                       | 2006      |   | 2006     |   | 2005     |  
|As
      at 31 March                   | $m        |   | £m       |   | £m       |  
|                                       |           |   |          |   |          |  
|Consolidated
      balance sheet data: |           |   |          |   |          |  
|Non-current
      assets               | 15,983.6  |   | 9,186.0  |   | 8,801.0  |  
|Current
      assets                   | 3,672.1   |   | 2,110.4  |   | 1,348.3  |  
|                                       |           |   |          |   |          |  
|Total
      assets                     | 19,655.7  |   | 11,296.4 |   | 10,149.3 |  
|Non-current
      liabilities          | (12,120.1 | ) | (6,965.6 | ) | (6,428.2 | )
|Current
      liabilities              | (2,957.8  | ) | (1,699.9 | ) | (1,576.7 | )
|                                       |           |   |          |   |          |  
|Total
      net assets                 | 4,577.8   |   | 2,630.9  |   | 2,144.4  |  
|                                       |           |   |          |   |          |  
|Share
      capital and share premium  | 3,972.8   |   | 2,283.2  |   | 1,754.9  |  
|Reserves
      and retained earnings   | 602.0     |   | 346.0    |   | 388.2    |  
|                                       |           |   |          |   |          |  
|Shareholders
      equity             | 4,574.8   |   | 2,629.2  |   | 2,143.1  |  
|Minority
      interest                | 3.0       |   | 1.7      |   | 1.3      |  
|                                       |           |   |          |   |          |  
|Total
      equity                     | 4,577.8   |   | 2,630.9  |   | 2,144.4  |  
|                                       |           |   |          |   |          |  
|                                      



|United
          Utilities Annual Report & Accounts 2006 | 115
|-------------------------------------------------------- | ---

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| |                                  | 
| | -------------------------------- | 
| | Information
    for shareholders | 
| |                                  | 

|                                                         |  |  | 
|-------------------------------------------------------- |  |  | 
|                                                         |  |  | 
|Selected
          consolidated financial data Continued |  |  | 
|                                                         |  |  | 



|Financial
    year                                               |  | 2006  |  | 2005  | 
|---------------------------------------------------------------- |  | ----- |  | ----- | 
|                                                                 |  |       |  |       | 
|Other
    financial data:                                        |  |       |  |       | 
|Average
    number of ordinary shares in issue  basic (million) |  | 853.9 |  | 781.0 | 
|Ratio of earnings to fixed charges(6)                            |  | 2.2x  |  | 2.1x  | 
|                                                                 |  |       |  |       | 

Amounts
in accordance with US GAAP

|                                                                   | 2006                                                                         |   | 2006     |   | 2005     |   | 2004     |   | 2003     |   | 2002     |  
|------------------------------------------------------------------ | ---------------------------------------------------------------------------- | - | -------- | - | -------- | - | -------- | - | -------- | - | -------- | -
|                                                                   | $                                                                            |   | £        |   | £        |   | £        |   | £        |   | £        |  
|                                                                   |                                                                              |   |          |   |          |   |          |   |          |   |          |  
|Financial
    year ended 31 March                                  | (in
       millions, except for information given per share
    and per ADS) |  
|                                                                   |                                                                              |   |          |   |          |   |          |   |          |   |          |  
|Consolidated
    income statement data:                            |                                                                              |   |          |   |          |   |          |   |          |   |          |  
|Group turnover(7)                                                  | 4,123.3                                                                      |   | 2,369.7  |   | 2,246.3  |   | 2,048.4  |   | 1,841.8  |   | 1,786.8  |  
|Net operating costs                                                | (3,368.1                                                                     | ) | (1,935.7 | ) | (1,650.0 | ) | (1,518.2 | ) | (1,330.5 | ) | (1,296.3 | )
|                                                                   |                                                                              |   |          |   |          |   |          |   |          |   |          |  
|Operating profit                                                   | 755.2                                                                        |   | 434.0    |   | 596.3    |   | 530.2    |   | 511.3    |   | 490.5    |  
|Net interest payable                                               | (363.3                                                                       | ) | (208.8   | ) | (254.6   | ) | (175.8   | ) | 5.3      |   | (293.4   | )
|                                                                   |                                                                              |   |          |   |          |   |          |   |          |   |          |  
|Profit before tax                                                  | 391.9                                                                        |   | 225.2    |   | 341.7    |   | 354.4    |   | 516.6    |   | 197.1    |  
|Tax charge on profit on ordinary activities                        | (86.7                                                                        | ) | (49.8    | ) | (89.2    | ) | (94.6    | ) | (111.2   | ) | (84.3    | )
|                                                                   |                                                                              |   |          |   |          |   |          |   |          |   |          |  
|Profit after tax                                                   | 305.2                                                                        |   | 175.4    |   | 252.5    |   | 259.8    |   | 405.4    |   | 112.8    |  
|Minority interest                                                  | (0.5                                                                         | ) | (0.3     | ) | (1.8     | ) | (1.6     | ) | (2.3     | ) | (1.6     | )
|                                                                   |                                                                              |   |          |   |          |   |          |   |          |   |          |  
|Profit after tax and minority interests                            | 304.7                                                                        |   | 175.1    |   | 250.7    |   | 258.2    |   | 403.1    |   | 111.2    |  
|                                                                   |                                                                              |   |          |   |          |   |          |   |          |   |          |  
|Basic earnings per share(5)(8)                                     | $0.36                                                                        |   | 20.5     | p | 32.1     | p | 39.0     | p | 66.5     | p | 18.4     | p
|Diluted earnings per share(8)                                      | $0.35                                                                        |   | 20.4     | p | 29.0     | p | 37.1     | p | 66.3     | p | 18.4     | p
|Average
    number of ordinary shares in issue  diluted (million) |                                                                              |   | 858.4    |   | 865.2    |   | 695.9    |   | 608.3    |   | 605.1    |  
|                                                                   |                                                                              |   |          |   |          |   |          |   |          |   |          |  

|                                      |           |   |          |   |          |   |          |   |          |   |          |  
|------------------------------------- | --------- | - | -------- | - | -------- | - | -------- | - | -------- | - | -------- | -
|                                      | 2006      |   | 2006     |   | 2005     |   | 2004     |   | 2003     |   | 2002     |  
|As
    at 31 March                    | $m        |   | £m       |   | £m       |   | £m       |   | £m       |   | £m       |  
|                                      |           |   |          |   |          |   |          |   |          |   |          |  
|Consolidated
    balance sheet data:  |           |   |          |   |          |   |          |   |          |   |          |  
|Non-current assets                    | 18,303.6  |   | 10,519.3 |   | 9,608.2  |   | 9,070.8  |   | 8,289.8  |   | 7,826.9  |  
|Current assets                        | 3,496.2   |   | 2,009.3  |   | 1,606.2  |   | 1,655.9  |   | 1,495.7  |   | 1,032.8  |  
|                                      |           |   |          |   |          |   |          |   |          |   |          |  
|Total assets                          | 21,799.8  |   | 12,528.6 |   | 11,214.4 |   | 10,726.7 |   | 9,785.5  |   | 8,859.7  |  
|Current liabilities                   | (2,982.9  | ) | (1,714.3 | ) | (1,530.1 | ) | (1,382.3 | ) | (1,290.2 | ) | (1,251.4 | )
|Non-current liabilities               | (12,006.8 | ) | (6,900.5 | ) | (6,278.5 | ) | (5,989.4 | ) | (5,679.9 | ) | (4,717.5 | )
|                                      |           |   |          |   |          |   |          |   |          |   |          |  
|Minority interest                     | (3.0      | ) | (1.7     | ) | (1.3     | ) | (19.6    | ) | (17.7    | ) | (15.2    | )
|                                      |           |   |          |   |          |   |          |   |          |   |          |  
|                                      | 6,807.1   |   | 3,912.1  |   | 3,404.5  |   | 3,335.4  |   | 2,797.7  |   | 2,875.6  |  
|                                      |           |   |          |   |          |   |          |   |          |   |          |  
|Capital stock                         | 1,399.1   |   | 804.1    |   | 716.2    |   | 711.8    |   | 556.5    |   | 555.9    |  
|Share premium account                 | 2,449.6   |   | 1,407.8  |   | 1,038.7  |   | 1,023.1  |   | 674.3    |   | 671.6    |  
|Reserves and retained earnings        | 2,958.4   |   | 1,700.2  |   | 1,649.6  |   | 1,600.5  |   | 1,566.9  |   | 1,648.1  |  
|                                      |           |   |          |   |          |   |          |   |          |   |          |  
|Shareholders equity                  | 6,807.1   |   | 3,912.1  |   | 3,404.5  |   | 3,335.4  |   | 2,797.7  |   | 2,875.6  |  
|                                      |           |   |          |   |          |   |          |   |          |   |          |  
|                                      |           |   |          |   |          |   |          |   |          |   |          |  
|Financial
    year                    |           |   | 2006     |   | 2005     |   | 2004     |   | 2003     |   | 2002     |  
|                                      |           |   |          |   |          |   |          |   |          |   |          |  
|Other
    financial data:             |           |   |          |   |          |   |          |   |          |   |          |  
|Ratio of earnings to fixed charges(6) |           |   | 1.5x     |   | 1.8x     |   | 2.1x     |   | 2.8x     |   | 1.7x     |  
|                                      |           |   |          |   |          |   |          |   |          |   |          |  

|    |                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Included
      within total operating expenses are restructuring items, which are disclosed
      separately on the face of the consolidated income statement under IFRS:

|                          |       |   |       |   |       |  
|------------------------- | ----- | - | ----- | - | ----- | -
|                          | 2006  |   | 2006  |   | 2005  |  
|Financial
      year      | $m    |   | £m    |   | £m    |  
|                          |       |   |       |   |       |  
|Restructuring
      costs | (44.4 | ) | (25.5 | ) | (29.7 | )
|                          |       |   |       |   |       |  

Further details of restructuring under IFRS are given in note 1 of the financial
statements.

|116 | United
        Utilities Annual Report & Accounts 2006
|--- | ------------------------------------------------------

---



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| |  |                                     
| |  | ------------------------------------
| |  | Information
        for shareholders
| |  |                                     
| |  |                                     
| |  |                                     
| |  |                                     
| |  |                                     



|(2) | As disclosed in note 33(l) of the consolidated financial statements the disposal of Your Communications on 26 February 2006 does not qualify as a discontinued
operation under US GAAP.        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                
|(3) | Operating profit before interest and tax is stated after the items scheduled below. The following table sets out the US GAAP equivalent to IFRS restructuring
items from continuing operations:

|                          |       |   |       |   |       |  
|------------------------- | ----- | - | ----- | - | ----- | -
|                          | 2006  |   | 2006  |   | 2005  |  
|Financial
      year      | $m    |   | £m    |   | £m    |  
|                          |       |   |       |   |       |  
|Restructuring
      costs | (42.1 | ) | (24.2 | ) | (31.8 | )
|                          |       |   |       |   |       |  

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | For business restructuring the decrease under US GAAP of £1.3 million
      in the year ended 31 March 2006 and the increase of £2.1 million in
      the year ended 31 March 2005 relate to costs being recognised in different
      accounting periods.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(4) | Calculated
      based on a ratio of two ordinary shares to one ADS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(5) | For
      the purposes of calculating basic earnings per share, the weighted average
      number of shares in issue under US GAAP is the same as under IFRS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(6) | For
      the purposes of calculating the ratio of earnings to fixed charges, earnings
      consists of profit on ordinary activities from continuing operations before
      tax, before adjustment for minority interests in consolidated subsidiaries
      plus fixed charges, and amortisation of capitalised interest less capitalised
      interest and minority interests. Fixed charges consists of interest
      expensed and capitalised plus amortised premiums, discounts and capitalised
      expenses related to indebtedness and the interest portion in rent expense.                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(7) | The
      difference between group revenue in 2006 and 2005 under US GAAP of £2,369.7
      million and £2,246.3 million respectively, and group revenue under
      IFRS of £2,386.8 million and £2,103.7 million respectively,
      is due to the revenue recognition difference between IFRS and US GAAP of
      £15.4 million (2005: £4.5 million), the reclassification of
      Your Communications revenue of £163.6 million (2005: £233.6
      million) and the reclassification of proportionately consolidated joint
      ventures revenue of £165.3 million (2005: £83.5 million)
      as shown in note 13 to the consolidated financial statements. Additionally,
      in the year ended 31 March 2006 £nil (2005: £3.0 million) was
      a revenue recognition difference in relation to reinstatement of liabilities
      as described in note 33(c).
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(8) | For
      the purposes of calculating the weighted average number of shares used in
      the earnings per share calculations, the A shares have been treated as part
      paid ordinary shares, two A shares being equivalent to one ordinary share,
      for the period prior to their consolidation as ordinary shares in July 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | Basic
      and diluted earnings per share have been restated for all periods prior
      to the rights issue to reflect the bonus element of the rights issue as
      required by IAS 33 Earnings Per Share. The same treatment is
      required under US GAAP. The adjustment factor, based on the consideration
      received from the second stage of the rights issue, is 1.0962, calculated
      using 653.5 pence per ordinary share, being the closing price on 27 June
      2005, the last day on which A shares were traded with the rights.                                                                                                                                                                                                                                                                                                                

| |                                                                                                            |   |                      
| | ---------------------------------------------------------------------------------------------------------- | - | ---------------------
| | The
          adjustment factor of 1.0962 is calculated as follows:                                        |   |                      
| |                                                                                                            |   |                      
| | Fair
          value per share immediately before exercise of rights                                       | = | 6.535
          pence
| |                                                                                                            |   |                      
| | Theoretical
          ex-rights fair value per share                                                       |   | 5.961
          pence
| |                                                                                                            |   |                      
| | The
          theoretical ex-rights fair value per share is calculated as follows:                        
| |                                                                                                            |   |                      
| | Fair
          value of all outstanding shares + Total amount received from exercise
          of rights  
| |                                                                                                           
| | Number
          of shares outstanding before exercise + Number of shares issued in the
          exercise
| |                                                                                                            |   |                      

| | = (717.5
          million ordinary shares x 653.5 pence) + (154.6 million A shares x 165
          pence) | =
          5.961 pence
| | ---------------------------------------------------------------------------------------------------------- | -----------------------
| |                                                                                                            |                        
| | 717.5
          million ordinary shares + 154.6 million A shares                                           |                        



|United
          Utilities Annual Report & Accounts 2006 | 117
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| | ---------------------------- | 
| | Information for shareholders | 
| |                              | 

|                                       
|---------------------------------------
|                                       
|Useful
    information for shareholders
|                                       



DividendsAn interim dividend in respect of each financial year is normally declared by United Utilities in November/December for payment in the following February. Since 2003, the final
dividend in respect of the financial year has been recommended by directors in May/June and paid in August, following approval by shareholders in July. Previously, the final dividend was paid in October. The following table sets out the dividends
paid on ordinary and A shares in respect of the past five financial years, excluding any associated UK tax credit in respect of such dividends.

|                                    |           |  |       |  |       | Years ended 31 March |       
|----------------------------------- | --------- |  | ----- |  | ----- | -------------------- | ------
|                                    |           |  |       |  |       |                      |       
|                                    | Note      |  | 2006  |  | 2005  |                      | 2004  
|Pence per share                     | (i)       |  | p     |  | p     |                      | p     
|                                    |           |  |       |  |       |                      |       
|Interim dividend per ordinary share |           |  | 14.29 |  | 14.79 |                      | 14.43 
|Final dividend per ordinary share   |           |  | 29.58 |  | 30.63 |                      | 29.88 
|                                    |           |  |       |  |       |                      |       
|Total dividend per ordinary share   |           |  | 43.87 |  | 45.42 |                      | 44.31 
|Total dividend per A share          |           |  | n/a   |  | 22.71 |                      | 22.155
|                                    |           |  |       |  |       |                      |       
|                                    |           |  |       |  |       |                      |       
|US $ per share                      | (i)       |  | $     |  | $     |                      | $     
|                                    |           |  |       |  |       |                      |       
|Interim dividend per ordinary share |           |  | 0.25  |  | 0.28  |                      | 0.27  
|Final dividend per ordinary share   |           |  | 0.51  |  | 0.58  |                      | 0.53  
|                                    |           |  |       |  |       |                      |       
|Total dividend per ordinary share   |           |  | 0.76  |  | 0.86  |                      | 0.80  
|Total dividend per A share          |           |  | n/a   |  | 0.43  |                      | 0.40  
|Total dividend per ADS($)           | (i), (ii) |  | 1.52  |  | 1.72  |                      | 1.60  
|                                    |           |  |       |  |       |                      |       

The exchange
    rates at the dividend payment dates were as
follows:

|                                      |       |  | 2006 |  | 2005 |  | 2004 |  | 2003 |  | 2002 | 
|------------------------------------- | ----- |  | ---- |  | ---- |  | ---- |  | ---- |  | ---- | 
|                                      |       |  |      |  |      |  |      |  |      |  |      | 
|Exchange rate at interim payment date |       |  | 1.72 |  | 1.86 |  | 1.86 |  | 1.63 |  | 1.42 | 
|Exchange rate at final payment date   | (iii) |  | 1.74 |  | 1.89 |  | 1.79 |  | 1.58 |  | 1.42 | 
|                                      |       |  |      |  |      |  |      |  |      |  |      | 

During the year ended 31 March 2004, the group announced a five-for-nine rights issue, structured so that the proceeds are received in two stages. The first tranche of proceeds,
received during September 2003, raised £501.2 million (net of costs) from the issuing of A shares. The second tranche of proceeds was received in June 2005, reflecting the subscription for further A shares. All A shares were consolidated and
reclassified as ordinary shares on the basis of one ordinary share for two A shares. The first dividend for which the initial A shares ranked was the 2003/04 interim dividend. The amount of this dividend is 50 per cent of that paid on an ordinary
share.

In the table
below, dividends per ordinary share and per ADS for periods prior to the rights
issue have been re-presented for comparative purposes to take account of the
bonus element of the first and second stages of the rights issue. The factor
applied
to the prior year dividends is 0.9342, which when combined to the factor applied
for the first stage of the rights issue of 0.9072 gives an overall factor of
0.8475. This overall factor is
calculated
using
576.0 pence
per ordinary share,  being the closing price on 25 July 2003, the last business
day
prior to the announcement of the rights issue.

|                                         |           |  |       |  |       |  |       | Years
    ended 31 March | 
|---------------------------------------- | --------- |  | ----- |  | ----- |  | ----- | ------------------------ | 
|                                         |           |  |       |  |       |  |       |                          | 
|                                         | Note      |  | 2006  |  | 2005  |  | 2004  | 2003                     | 
|Pence per ordinary share                 | (i)       |  | p     |  | p     |  | p     | p                        | 
|                                         |           |  |       |  |       |  |       |                          | 
|Interim (re-presented)                   |           |  | 14.29 |  | 13.82 |  | 13.48 | 13.14                    | 
|Final (re-presented)                     |           |  | 29.58 |  | 28.61 |  | 27.91 | 27.20                    | 
|                                         |           |  |       |  |       |  |       |                          | 
|Total (re-presented)                     |           |  | 43.87 |  | 42.43 |  | 41.39 | 40.34                    | 
|                                         |           |  |       |  |       |  |       |                          | 
|                                         |           |  |       |  |       |  |       |                          | 
|US $ per ordinary share                  | (i)       |  | $     |  | $     |  | $     | $                        | 
|                                         |           |  |       |  |       |  |       |                          | 
|Interim (re-presented)                   |           |  | 0.25  |  | 0.26  |  | 0.25  | 0.21                     | 
|Final (re-presented)                     |           |  | 0.51  |  | 0.54  |  | 0.50  | 0.43                     | 
|                                         |           |  |       |  |       |  |       |                          | 
|Total (re-presented)                     |           |  | 0.76  |  | 0.80  |  | 0.75  | 0.64                     | 
|Total dividend per ADS($) (re-presented) | (i), (ii) |  | 1.52  |  | 1.60  |  | 1.50  | 1.28                     | 
|                                         |           |  |       |  |       |  |       |                          | 

|      
|------
|Notes:
|      
|(i)   
|      
|(ii)  
|      
|(iii) 

Future
    dividends will depend upon the companys earnings, financial condition
    and other factors. Interim and final dividends paid in the past are not necessarily
    indicative of future interim and final dividends, or the future relationships
    between them. A person resident in the UK for tax purposes who receives a
    dividend from United Utilities is generally entitled to a tax credit, currently
    at a rate of one-ninth of the net dividend (or ten per cent of the sum of
    the net dividend and the associated UK tax credit). For further information,
    see the Taxation section on page 122.

Cash dividends
  are paid by United Utilities in pounds sterling. Exchange rate fluctuations
  will affect the US dollar amounts received by owners of the ADSs on the conversion
  by the Depositary of such cash dividends paid. In addition, fluctuations in
  the exchange rate between pounds sterling and US dollars will affect the US
  equivalent of the quoted pound sterling price of ordinary shares on the London
  Stock Exchange, and as a result, are likely to affect the market price of ADSs
  in the US.



|118 | United Utilities Annual Report & Accounts 2006
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| |  | ----------------------------
| |  | Information for shareholders
| |  |                             
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| |  |                             
| |  |                             
| |  |                             



Exchange
  controlsThere
  are currently no UK foreign exchange control restrictions on the export or import
  of capital which affect the remittance of dividends, interest or other payments
  to non-UK resident holders of the companys securities except as otherwise
  detailed in the Taxation section of this document on page 122.

Exchange ratesIn
  this report, unless otherwise specified or unless the context requires otherwise,
  all references to pound, sterling, pounds sterling,
  GBP, £, p and pence are
  to the lawful currency of the United Kingdom. The company publishes its consolidated
  financial statements in sterling. In this report, all references to US
  dollars, US$ and $ are to the lawful currency
  of the United States of America (United States or US).
  Amounts stated in US dollars, unless otherwise indicated, have been translated
  from sterling at an assumed rate solely for convenience, and should not be construed
  as representations that the sterling amounts actually represent such US dollar
  amounts or could be converted into the US dollars at the rate indicated or any
  other rate. Unless otherwise indicated, such US dollar amounts have been translated
  from sterling at the rate of £1.00 = $1.74, the noon buying rate in the
  City of New York for cable transfers in pounds sterling as certified for customs
  purposes by the Federal Reserve Bank of New York (noon buying rate)
  on 31 March 2006. The noon buying rate on 31 March 2006 differs from the actual
  rates used in the preparation of the companys consolidated financial statements,
  and US dollar amounts used in this report may differ from the actual US dollar
  amounts that were translated into sterling in the preparation of such financial
  statements.

The
  following table sets out, for the financial year indicated, certain information
  concerning the noon buying rate for pounds sterling and US dollars per £1.00:

|Financial
    year | High
    $ |  | Low
    $ |  | Average(1)$ |  | Period
    end $ | 
|------------------ | ---------- |  | --------- |  | ----------- |  | ---------------- | 
|                   |            |  |           |  |             |  |                  | 
|2001               | 1.60       |  | 1.40      |  | 1.47        |  | 1.42             | 
|2002               | 1.48       |  | 1.37      |  | 1.43        |  | 1.42             | 
|2003               | 1.65       |  | 1.43      |  | 1.55        |  | 1.58             | 
|2004               | 1.90       |  | 1.55      |  | 1.71        |  | 1.84             | 
|2005               | 1.95       |  | 1.75      |  | 1.85        |  | 1.89             | 
|2006               | 1.92       |  | 1.71      |  | 1.79        |  | 1.74             | 
|                   |            |  |           |  |             |  |                  | 

|    |                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------
|(1) | The
      average of the noon buying rate on the last day of each month during the
      relevant period.

|         |              |  |             | 
|-------- | ------------ |  | ----------- | 
|Month    | High
      $ |  | Low
      $ | 
|         |              |  |             | 
|2005     |              |  |             | 
|December | 1.77         |  | 1.72        | 
|2006     |              |  |             | 
|January  | 1.79         |  | 1.74        | 
|February | 1.78         |  | 1.73        | 
|March    | 1.76         |  | 1.73        | 
|April    | 1.82         |  | 1.74        | 
|May      | 1.89         |  | 1.83        | 
|         |              |  |             | 

On
  1 June 2006, the noon buying rate was US$1.87 per £1.00.

Material contractsUnited
  Utilities, through its subsidiary United Utilities Water, holds a licence for
  the provision of water supply and wastewater services in an area of north west
  England comprising 3.1 million homes and businesses. In addition, United Utilities,
  through its subsidiary United Utilities Electricity, holds the electricity distribution
  licence for an area in north west England comprising 2.3 million consumer premises.
  For more information on these licences see Economic regulation of wastewater
  and water on pages 6, 7 and 8 and Economic regulation of electricity
  distribution on pages 9, 10 and 11.

|(a) | On
      13 October 1998, United Utilities, United Utilities Electricity (formerly
      NORWEB plc) and North West Water Finance PLC (which was subsequently replaced
      by United Utilities Water) established a US$2,000,000,000 European Medium
      Term Note Programme (EMTN) under a trust deed that was amended
      on 23 November 2005 between United Utilities PLC, United Utilities Electricity
      PLC, United Utilities Water PLC and The Law Debenture Trust Corporation
      p.l.c. The maximum aggregate nominal amount of notes which may be outstanding
      from time to time under the EMTN was increased to US$3,000,000,000 on 5
      October 1999, increased to €4,000,000,000 on 4 October 2001 and further
      increased to €5,000,000,000 on 3 October 2003. An updated offering
      circular for the programme was published on 23 November 2005. As at 31 March
      2006, a total of €4,033,217,050 of notes were outstanding under the
      EMTN;
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(b) | In
      March 1998, United Utilities, United Utilities Electricity and North West
      Water Finance PLC (which was subsequently replaced by United Utilities Water)
      established an unlisted Euro Commercial Paper Programme (the ECP Programme).
      The aggregate principal amount of the notes outstanding at any one time
      under the ECP Programme may not exceed US$1,500,000,000 or its equivalent
      in alternative currencies. Any notes issued under the ECP Programme may
      only mature after seven but not more than 365 (364 for sterling notes) days
      from issue. The programme amount may be increased from time to time. As
      at 31 March 2006, a total of US$379,409,524 of notes were outstanding under
      the ECP Programme;                                                                                                                                                                                                                



|United
          Utilities Annual Report & Accounts 2006 | 119
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| |                                    | 
| | ---------------------------------- | 
| | Information
      for shareholders | 
| |                                    | 

|                                                 
|-------------------------------------------------
|                                                 
|Useful
    information for shareholders continued
|                                                 
|                                                 

|(c) | In
      August 1995, United Utilities Electricity issued £200,000,000 8.875
      per cent listed bonds due 2026. The bonds are in bearer form in denominations
      of £1,000, £10,000 and £100,000 each and in registered
      form in amounts of £1.00 or integral multiples thereof and were constituted
      under a trust deed dated 3 August 1995 between United Utilities Electricity
      and The Law Debenture Trust Corporation p.l.c. as trustee. United Utilities
      Electricity issued further bonds on the same terms on 6 July 2001 and 20
      December 2001. On 15 February 2002, United Utilities Electricity issued
      further bonds, again on the same terms, and consolidated the four issues
      to form a fungible single series of an aggregate outstanding amount of £450,000,000;
      and                                                                                                                                                                                                                                                          
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(d) | On
      25 March 1998, United Utilities issued US$500,000,000 6.45 per cent notes
      due 1 April 2008 under an indenture dated 25 March 1998. On 28 July 1998,
      United Utilities issued U$400,000,000 6.875 per cent notes due 15 August
      2028 under an indenture dated 28 July 1998. All of these bonds are US Securities
      and Exchange Commission (SEC) F-1 registered Yankee bonds. In
      April 2001, United Utilities filed an F-3 shelf registration with the SEC
      enabling the company to issue up to US$2,000,000,000 of debt securities
      (the US Programme) under an indenture dated 17 June 2003 by
      and between United Utilities PLC and Deutsche Bank Trust Company Americas.
      On 19 June 2003, United Utilities issued US$250,000,000 4.55 per cent notes
      due 19 June 2018 and on 16 January 2004 issued US$350,000,000 5.37 5 per
      cent notes due 1 February 2019 under the US Programme. As at 31 March 2006,
      a total of US$1,500,000,000 of F-1 and F-3 SEC registered debt securities
      remain outstanding.

Memorandum and articlesUnited
  Utilities PLC was incorporated on 1 April 1989 and registered with the Registrar
  of Companies in England and Wales number 2366616. The memorandum of association
  of the company provides that its principal objects are, among other things,
  to be a holding company and to carry on business as a general commercial company
  and to carry on any trade or business or activity of any nature which may seem
  to the directors to be capable of being conveniently or advantageously carried
  on.

DirectorsA
  director of the company shall not vote, and shall not be counted in the quorum,
  in relation to any resolution of the directors or of a committee of the directors
  on any resolution concerning any contract, arrangement, transaction or any proposal
  whatsoever to which the company is or is to be a party and in which he has,
  directly or indirectly, any material interest other than, inter alia, as a shareholder
  of the company.

So
  far as the legislation allows, the directors may exercise all the companys
  powers to borrow money; to mortgage or charge all or any of the companys
  undertaking, property (present and future), and uncalled capital; to issue debentures
  and other securities; and to give security either outright or as collateral
  security for any debt, liability or obligation of the company or any third party.
  Such powers can be amended by the sanction of a special resolution and at the
  2006 annual general meeting the borrowing powers of the directors were amended
  so that whilst the total amount that the directors can borrow does not, as with
  the previous articles, exceed two and a half times the amount of its adjusted
  capital and reserves, when calculating the total amount that the directors may
  borrow, the amount of any pension scheme surplus or deficit arising from the
  application of relevant accounting standards has been excluded from the calculation
  of adjusted capital and reserves.

At
  the 2005 annual general meeting the limit on the total amount which may be paid
  in fees for non-executive directors was increased from £550,000 to £750,000.
  This limit relates only to the total fees paid to non-executive directors and
  not to the amount payable to executive directors in respect of their employment
  with the company.

The
  articles adopted at the 2005 annual general meeting incorporate changes which
  are consistent with those made by The Companies (Audit, Investigations and Community
  Enterprise) Act 2004 which clarify and extend the permitted scope of the indemnity
  which companies may provide for their directors and employees.

A director
  shall be capable of being appointed or re-elected as a director despite having
  attained the age of 70 or any other age and shall not be required to retire
  by reason of his having attained any particular age and section 293 of the UK
  Companies Act 1985 (the Companies Act) (relating to the appointment
  and retirement as directors of persons who are aged 70 or over) shall not apply.
  A director shall not be required to hold any shares in the company.

The
  articles provide for directors to retire from office and seek re-election by
  the companys shareholders in various circumstances. A director appointed
  by the board must retire at the next annual general meeting of the company following
  his appointment. A non-executive director who has served as a director of the
  company for a continuous period of nine years or more must retire from office
  at each following annual general meeting. Ordinarily each director must retire
  at the third annual general meeting following his appointment or last reappointment
  by the shareholders of the company.

In
  addition, at each annual general meeting one third of the directors (or, if
  their number is not three or a multiple of three, the number nearest to but
  not exceeding one third) must retire from office by rotation. In determining
  the number and the identity of the directors required to retire by rotation,
  those directors required to retire as a result of their initial appointment
  by the board and non-executive directors retiring under the nine-year
  provision, are not taken into account. In each case, the retiring directors
  may offer themselves for reappointment by the companys shareholders at
  the meeting at which they are required to retire.



|120 | United
        Utilities Annual Report & Accounts 2006
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| |  | Information
      for shareholders
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| |  |  | 
| |  |  | 
| |  |  | 



Shares
  The holders
  of shares of the company are entitled to the profits of the company available
  for distribution and resolved to be distributed, in proportion to the number
  of shares held by them and the amounts paid up or credited as paid up on such
  shares. With the sanction of an ordinary resolution of the company, the directors
  may offer any holders of shares the right to elect to receive further shares,
  credited as fully paid, instead of cash in respect of the whole or part of any
  dividend. All dividends unclaimed for a period of 12 years after having been
  declared shall (if the board so resolves) be forfeited and shall cease to be
  owed by the company.

On 6
  July 2005, all the A shares were converted into ordinary shares upon the completion
  of the two stage rights issue and all references to them are now omitted from
  the articles of association. All the A shares were converted into ordinary shares
  at a rate of two-for-one. A Special Resolution was passed at the 2006 annual
  general meeting such that the articles now contain a number of provisions reflecting
  the fact that any shares held in treasury shall not rank for dividends or carry
  voting rights and shall, for certain purposes, be deemed excluded from the companys
  issued share capital.

If the
  company is wound up, the liquidator may, with the sanction of a Special Resolution
  of the company and any other sanction required by law, divide among the members
  in specie the whole or any part of the assets of the company and may, for that
  purpose, value any assets and determine how the division shall be carried out
  as between the members or different classes of members. Any such division may
  be otherwise than in accordance with the existing rights of the members but,
  if any division is resolved otherwise than in accordance with such rights, the
  members shall have the same right of dissent and consequential rights as if
  such resolution were a special resolution passed pursuant to section 110 of
  the Insolvency Act 1986. The liquidator may, with the like sanction, vest the
  whole or any part of the assets in trustees on such trusts for the benefit of
  the members as he, with the like sanction, shall determine, but no member shall
  be compelled to accept any assets on which there is a liability.

All substantive
  resolutions put to a vote at a general meeting shall be decided on a poll. All
  other resolutions shall be decided on a show of hands. Every holder of ordinary
  shares present in person shall on a show of hands have one vote, and every holder
  of ordinary shares present in person or by proxy shall on a poll have one vote
  for every ordinary share of which he is the holder. At the 2006 annual general
  meeting, a Special Resolution was passed so that the articles contain a number
  of provisions so that proxies may now be submitted either by delivery of a proxy
  form or by electronic means.

The chairman
  of a general meeting has absolute discretion in determining whether a resolution
  is a substantive resolution or another resolution and his decision shall be
  final. If a shareholder has been given notice in accordance with section 212
  of the Companies Act and has failed to provide the necessary information in
  accordance with the statutory timeframes, the shareholder shall not be entitled
  to exercise their right to vote at the meeting; a further restriction exists
  should a call or any other sum due and payable by the shareholder remain unpaid.

Section
  80 of the Companies Act provides that, to allot any relevant securities (as
  defined in the Companies Act and which includes, with certain exceptions, shares
  and securities convertible into shares), the directors require authorisation
  which may be given in the articles of association or by ordinary resolution
  of shareholders stating the maximum amount which may be allotted and the date
  on which the authority will expire (being not more than five years from the
  date of such authority).

Shareholders
  have rights of pre-emption in respect of the allotment of equity securities
  (as defined in the Companies Act and which includes, with certain exceptions,
  shares and securities convertible into shares) which are, or are to be, paid
  up in cash, although these pre-emptive rights can be displaced or modified by
  a special resolution of the shareholders or under the articles of association.

The authority
  given by such a special resolution can last for five years. In practice, a company
  whose shares are publicly traded is unlikely to receive shareholder consent
  for the disapplication of pre-emptive rights in respect of shares representing
  more than five per cent of its existing issued ordinary share capital.

Subject
  to the exceptions referred to below, if a holding of any class or classes of
  shares or any interest in them (other than certain exempt interests) reaches
  three per cent of the aggregate nominal value of the issued voting share capital
  (or, in the case of the companys share capital being divided into different
  classes, issued voting shares comprised in the relevant class), the shareholder
  (whether foreign or domestic) must notify the company of the interest within
  two business days of the acquisition taking the holding over three per cent
  and of any subsequent increase or decrease in the extent of that interest.

There
  are less stringent requirements for certain categories of interests in shares
  (non-material interests), for example, interests held by managers
  of certain collective investment schemes. Non-material interests need only be
  disclosed when the aggregate of those interests and other interests (other than
  exempt interests) reaches a threshold of ten per cent of the aggregate nominal
  value of the share capital concerned. The Companies Act gives a public company
  power to require persons whom it believes to be, or to have been within the
  previous three years, interested in its voting shares, to disclose prescribed
  particulars of those interests. Failure to supply the information required is
  an offence and may lead to disenfranchisement of the relevant shares and a prohibition
  on their transfer and on dividend and other payments in respect of them and
  the issue of additional shares in respect thereof.

Under
  the Rules Governing Substantial Acquisitions of shares, where a
  person or company acquires 15 per cent or more of the voting rights of a listed
  company or where an acquisition increases their holding of shares or rights
  over shares which would amount to an increase in voting rights by a whole percentage
  point, notification must be given to the company and the London Stock Exchange
  no later than noon on the business day following the date of acquisition.



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          Utilities Annual Report & Accounts 2006 | 121
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      for shareholders | 
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|Useful
      information for shareholders continued |  |  | 
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General
  meetings 21 clear
  days written notice is required to be given to shareholders for an annual
  general meeting or an extraordinary general meeting where a special resolution
  is to be proposed. Ordinarily, only 14 clear days notice is required for
  an extraordinary general meeting. An annual general meeting can be held at shorter
  notice provided that all the shareholders entitled to attend and vote agree;
  and, in the case of an extraordinary general meeting, if shareholders holding
  95 per cent in nominal value entitled to attend and vote agree. If a shareholder
  is unable to attend the general meeting they are entitled to appoint a proxy
  to vote on their behalf and a corporate body is entitled to appoint a corporate
  representative to vote on its behalf. The articles of association adopted at
  the 2005 annual general meeting added a number of provisions which reflect the
  fact that proxies may be submitted either by delivery of a proxy form or by
  electronic means either by the companys registrars or by the CREST proxy
  appointment service.

Not more
  than 15 months shall elapse between one annual general meeting and the next.
  In addition to the directors, a member or members holding not less than one-tenth
  of the paid-up capital can require that a general meeting be convened.

There
  are no limitations imposed by UK law or the companys memorandum and articles
  of association which restrict the right of non-UK resident or non-UK citizen
  owners, as opposed to UK resident or citizen owners, to hold shares in the company
  or to exercise any voting rights. However, shareholders with a registered address
  outside the UK are not entitled to receive notice from the company, including
  notices of general meetings, unless they have given the company an address in
  the UK to which such notices may be sent.

All shares
  of the same share class rank pari passu.

TaxationThe
  following is a summary of the principal US federal and UK tax considerations
  that are likely to be material to the ownership and disposition of ordinary
  shares or ADSs by a holder that is a resident of the US for the purposes of
  the income tax convention which was signed on behalf of the US and the UK on
  24 July 2001 and entered into force on 31 March 2003 (the Treaty)
  or, in the circumstances described below, the previous income tax convention
  between the US and the UK (the Old Treaty) and is fully eligible
  for benefits thereunder (an eligible US holder) and satisfies the
  three conditions set out below. The summary does not purport to be a comprehensive
  description of all of the tax considerations that may be relevant to a holder
  of ordinary shares or ADSs. In particular, the summary deals only with eligible
  US holders which hold ordinary shares or ADSs as capital assets, and does not
  address the tax treatment of investors which are subject to special tax rules,
  such as banks, tax-exempt entities, insurance companies, dealers in securities
  or currencies, persons that elect mark-to-market treatment, persons that hold
  ordinary shares or ADSs as part of an integrated investment (including a straddle)
  comprised of an ordinary share or ADS and one or more other positions, and persons
  that own, directly or indirectly, ten per cent or more of the voting stock of
  the company. This summary is based on the Treaty, the Old Treaty and the tax
  laws of the US and the UK in effect on the date hereof, which are subject to
  change.

Holders
  should consult their own tax advisers with respect to the implications in their
  own particular circumstances of the election, including the possible entitlement
  to a special US foreign tax credit described below under Taxation of dividends
   United States.

This
  summary applies to eligible US holders if they are:

| | the
      beneficial owner of the ordinary shares or ADSs and of any dividends received;                                                                                                                                                                                                 
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | an
      individual citizen or resident of the United States, a US corporation, or
      otherwise subject to US federal income tax on a net income basis in respect
      of their shares or ADSs; and                                                                                  
| | not
      also a resident of the United Kingdom for UK tax purposes and they do not
      hold ordinary shares or ADSs in connection with the conduct of a business
      through a permanent establishment or the performance of personal services
      through a fixed base in the UK.

Special
  rules, including a limitation of benefits provision, apply in limited circumstances
  under the Treaty to shares or ADSs owned by an investment or holding company.
  This section does not discuss the treatment of such holders.

Holders
  should consult their own advisers regarding the tax consequences of the acquisition,
  ownership, and disposition of ordinary shares or ADSs in the light of their
  particular circumstances, including the effect of any state, local, or other
  national laws.

Beneficial
  owners of ADSs will be treated as owners of the underlying shares for US federal
  income tax purposes and deposits and withdrawals of shares in exchange for ADSs
  will not result in the realisation of gain or loss for US federal income tax
  purposes.



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    Utilities Annual Report & Accounts 2006
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Taxation
  of dividendsUnited
  KingdomThere
  is no UK withholding tax on dividends. A shareholder resident for UK tax purposes
  in the UK who receives a dividend from the company will generally be entitled
  to a tax credit equal to one-ninth of the dividend. The Old Treaty allowed an
  eligible US holder to claim a similar tax credit from the UK Revenue. However,
  it also provided for a notional UK withholding tax which, in the case of an
  eligible US holder that owned, directly or indirectly, less than ten per cent
  of the voting stock of the company, was set at 15 per cent of the aggregate
  of the dividend and the credit. This meant that no amount was actually payable
  to such holders by the UK Revenue in respect of their tax credit entitlement.

The Treaty
  provides neither for the right to claim the credit nor for the notional withholding
  tax. The result is that no eligible US holder will be entitled by virtue of
  the Treaty to an additional payment from the UK Revenue on receipt of a dividend
  from the company.

United
  StatesEligible
  US holders must include dividends received in ordinary income on the date such
  a holder or ADS depositary received them. The dividends will be treated as foreign
  source income. Eligible US holders should determine the amount of dividend income
  by converting pounds sterling into US dollars at the exchange rate in effect
  on the date of such holders (or the depositarys, in the case of
  ADSs) receipt of the dividend. Subject to certain exceptions for positions that
  are hedged or held for less than 61 days, an individual eligible US holder generally
  will be subject to US taxation at a maximum rate of 15 per cent in respect of
  qualified dividends received before 2009.

Dividends
  received with respect to the ordinary shares or ADSs will be qualified dividends
  if United Utilities was not, in the year prior to the year in which the dividend
  was paid, and is not, in the year in which the dividend is paid, a passive foreign
  investment company (PFIC). Based on United Utilities audited
  financial statements and relevant market data, United Utilities believes that
  it was not treated as a PFIC for US federal income tax purposes with respect
  to its 2004 or 2005 taxable year. In addition, based on United Utilities
  audited financial statements and its current expectations regarding the value
  and nature of its assets, the sources and nature of its income, and relevant
  market data, United Utilities does not anticipate becoming a PFIC for its 2006
  taxable year.

Taxation
  of capital gainsUnited
  KingdomGain
  realised by an eligible US holder on the sale or other disposition of ordinary
  shares or ADSs will not be subject to UK taxation, provided that such shares
  are not held in connection with a UK branch or agency or (in relation to a corporate
  holder) a UK permanent establishment.

United
  StatesGain
  realised on the sale, exchange or other disposition of ordinary shares or ADSs
  will be included in income for US tax purposes and will be long-term capital
  gain if the ordinary shares or ADSs were held for more than one year. The net
  long-term capital gain recognised by an individual eligible US holder before
  1 January 2009 generally is subject to taxation at a maximum rate of 15 per
  cent.

Backup
  withholding tax and information reportingDistributions
  made on ordinary shares and proceeds from the sale of ordinary shares or ADSs
  that are paid within the UK or through certain US-related financial intermediaries
  to US holders are subject to information reporting and may be subject to a backup
  US withholding tax unless, in general, the US holder complies with certain procedures
  or is a corporation or other person exempt from such withholding. Holders that
  are not US persons generally are not subject to information reporting or backup
  withholding tax, but may be required to comply with applicable certification
  procedures to establish that they are not US persons in order to avoid the application
  of such information reporting requirements or backup withholding tax to payments
  received within the US or through certain US-related financial intermediaries.

Stamp
  duty and stamp duty reserve taxA
  transferee of ordinary shares will generally be required to pay UK stamp duty
  or stamp duty reserve tax at a rate of 0.5 per cent of the consideration paid
  for the transfer.

However,
  no UK stamp duty should be payable on the transfer of an ADS or beneficial ownership
  of an ADS, provided that any instrument of transfer is executed and remains
  at all times outside the UK, and no UK stamp duty reserve tax should in any
  event be payable on an agreement to transfer an ADS or beneficial ownership
  of an ADS.



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          Utilities Annual Report & Accounts 2006 | 123
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Listing
  and price historyThe
   principal trading market for the shares of the company is the London Stock
  Exchange.
  The ordinary shares have been listed on the London Stock Exchange since 12
  December  1989. The American depositary shares (ADSs), each representing two
  ordinary
  shares, have been listed on the New York Stock Exchange since 28 January 1998.
   The ADSs, evidenced by American depositary receipts (ADRs), are issued by
  JPMorgan Chase Bank, N.A. (JPMorgan), as Depositary under a Deposit Agreement
   dated 9 June 2006 between the company, JPMorgan Chase Bank, N.A. and the
  holders from time to
  time of ADSs.

The table
  below sets out, for the periods indicated, (i) the highest and lowest middle-market
  quotations for the ordinary shares (as derived from the Daily Official List
  of the London Stock Exchange); and (ii) the reported high and low sale prices
  of the United Utilities ADSs on the New York Stock Exchange.

|                          | London
      Stock Exchange |  | New
      York Stock Exchange | 
|------------------------- | --------------------------- |  | ----------------------------- | 
|                          | per
      ordinary share    |  | per
      ADS                 | 
|                          |                             |  |                               | 
|                          | High
      (p)              |  | Low
      (p)                 | 
|                          |                             |  |                               | 
|Financial
      year 2002 | 582.3                       |  | 499.7                         | 
|                          |                             |  |                               | 
|Financial
      year 2003 | 577.6                       |  | 476.8                         | 
|                          |                             |  |                               | 
|Financial
      year 2004 |                             |  |                               | 
|First
      quarter       | 544.3                       |  | 504.9                         | 
|Second
      quarter      | 505.8                       |  | 454.8                         | 
|Third
      quarter       | 511.8                       |  | 453.8                         | 
|Fourth
      quarter      | 525.0                       |  | 472.5                         | 
|                          |                             |  |                               | 
|Financial
      year 2005 |                             |  |                               | 
|First
      quarter       | 561.0                       |  | 518.5                         | 
|Second
      quarter      | 558.5                       |  | 505.0                         | 
|Third
      quarter       | 633.0                       |  | 545.0                         | 
|Fourth
      quarter      | 662.5                       |  | 598.5                         | 
|                          |                             |  |                               | 
|Financial
      year 2006 |                             |  |                               | 
|First
      quarter       | 685.0                       |  | 623.5                         | 
|Second
      quarter      | 665.0                       |  | 623.0                         | 
|Third
      quarter       | 685.5                       |  | 612.0                         | 
|Fourth
      quarter      | 700.0                       |  | 651.0                         | 
|December
      2005       | 685.5                       |  | 645.5                         | 
|January
      2006        | 678.0                       |  | 651.0                         | 
|February
      2006       | 700.0                       |  | 679.0                         | 
|March
      2006          | 700.0                       |  | 674.0                         | 
|                          |                             |  |                               | 
|Financial
      year 2007 |                             |  |                               | 
|April
      2006          | 695.5                       |  | 671.0                         | 
|May
      2006            | 673.0                       |  | 642.0                         | 
|                          |                             |  |                               | 

These
  share prices have been adjusted for all periods prior to the rights issue using
  an adjustment factor based on the consideration received from the first stage
  of the rights issue and assumed proceeds from the second stage, which were received
  in June 2005. The adjustment factor is 0.8646 calculated using 531.5 pence per
  ordinary share, being the closing price on 26 August 2003, the date of approval
  of the rights issue at the extraordinary general meeting. This adjustment reflects
  the full bonus element of the rights issue which arose at the first stage, as
  demonstrated by the movement in the share price following the approval of the
  rights issue at the extraordinary general meeting.

Documents
  on display in the USUnited
  Utilities is subject to the information requirements of the US Securities Exchange
  Act of 1934 as amended (the Exchange Act), and is therefore required
  to file reports, including annual reports on Form 20-F, and other information
  with the US Securities and Exchange Commission. These materials, including this
  annual report and the exhibits to Form 20-F, may be inspected and copied at
  the Commissions public reference rooms in Washington, DC, New York, NY
  and Chicago, Ill. Please call the Commission at +1-800-732-0330 for further
  information on the public reference rooms. Any filings made electronically will
  be made available to the public over the internet at the Commissions website
  at www.sec.gov.



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Other
  useful information for shareholdersKey
  events for shareholders The company
  is holding its 2006 annual general meeting on Friday 28 July 2006 at the Bridgewater
  Hall, Manchester, England. The meeting will start at 11.00 a.m. The notice calling
  the meeting and a full explanation of the resolutions to be proposed at the
  meeting are set out in the leaflet sent to shareholders with this report.

During
  the next year, the company will:

| | pay
      the 2006 final dividend on 25 August 2006;                                                                                               
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                    
| | announce
      the half-year results in December 2006;                                                                                             
|  |                                                                                                                                                    
| | pay
      the 2007 interim dividend in February 2007;                                                                                              
|  |                                                                                                                                                    
| | announce
      the preliminary full-year results in May/June 2007;                                                                                 
|  |                                                                                                                                                    
| | publish
      the combined annual report and accounts and Form 20-F, the stakeholder report
      and summary financial statement in June 2007; and
|  |                                                                                                                                                    
| | hold
      the annual general meeting in July 2007.                                                                                                

Keeping
  you in the picture You can
   find more information about United Utilities quickly and easily on the United

  Utilities website. In addition to the annual report and accounts, the stakeholder
   report and other reports, company announcements are also published on the
  website,
  including the interim and preliminary results announcements and associated
  presentations.www.unitedutilities.com/corporatereports

In addition
  to these reports, the group also publishes in printed form a wide range of reports,
  leaflets and factsheets about aspects of its businesses. You can get more information
  about them from Gaynor Kenyon, group director of communications, at Dawson House,
  Great Sankey, Warrington WA5 3LW (telephone: +44 (0) 1925 237000; email: gaynor.kenyon@uuplc.co.uk).

Copies
  of the separate regulatory accounts for the year ended 31 March 2006 for the
  licensed water and electricity businesses, which are required to be given to
  the water and energy regulators, are available free of charge. If you would
  like copies please contact Jonathan Williams in the group secretariat on +44
  (0) 1925 237000, or alternatively they are available on the website.

Enquiring
  about your shareholding If you
  want to ask about your shareholding, or need any information, please contact
  the companys registrar, Lloyds TSB Registrars, The Causeway, Worthing,
  West Sussex BN99 6DA (telephone: +44 (0) 870 600 3971 or textphone for shareholders
  with hearing difficulties: +44 (0) 870 600 3950).

The registrars
  website allows shareholders with internet access to view details of their shareholdings
  and dividends, to vote at general meetings and to register to receive communications
  electronically. You can use the tools on the website to value your portfolio
  by reference to a recent market price and, if you wish, sell your shares online.
  To register with Shareview go to www.shareview.co.uk, click on Create
  a portfolio and follow the onscreen registration process using the eight-digit
  account number on the enclosed proxy form.

If you
  have received more than one copy of this document, you may have more than one
  account in your name on the register of members. To merge your holdings, please
  write to Lloyds TSB Registrars at the above address, giving details of the accounts
  concerned and how you want them to be merged.

Paying
  your dividends direct to your account The registrars
  pay dividends direct to a shareholders bank or building society account
  through the BACS (Bankers Automated Clearing Service) system. If you have
  not already arranged for your dividends to be paid direct to your bank or building
  society account and you want to do so, please contact the companys registrar,
  at the address above.

Dealing
  in United Utilities shares cost effectively You can
  now buy or sell our ordinary shares using Lloyds TSB Registrars low cost
  share dealing service (telephone: +44 (0) 870 850 0852) or deal online atwww.shareview.co.uk/dealing

Holding
  your shares tax efficiently The United
  Utilities single company ISA (a Maxi or Mini shares-only individual savings
  account), managed by Lloyds TSB Registrars, offers a tax-efficient way of holding
  United Utilities shares. To get more information, please ring +44 (0)
  870 24 24 244 stating that you are a United Utilities shareholder.

Donating
  shares to the ShareGift scheme Many shareholders
  can find themselves owning parcels of shares so small that it would cost more
  to sell them than they are worth. The ShareGift scheme, a registered charity
  administered by The Orr Mackintosh Foundation, allows you to donate shares to
  the Foundation which aggregates them, sells them when possible and donates the
  proceeds to a growing list of charities. If you would like further information,
  write to The Orr Mackintosh Foundation, 46 Grosvenor Street, London, W1K 3HN
  (telephone: +44 (0) 20 7337 0501), or visit the schemes website atwww.sharegift.org



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          Utilities Annual Report & Accounts 2006 | 125
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|Useful
      information for shareholders continued
|                                                    |                                    | 



Enquiring
  about the American listingUnited
  Utilities shares are listed on the New York Stock Exchange in the form
  of American depositary shares (ADS), evidenced by American depositary receipts
  (ADR), and trade under the symbol UU. Each ADS represents two shares. JPMorgan
  Chase Bank, N.A. is the depositary and its address for enquiries is JPMorgan
  Chase Bank, N.A., JPMorgan Service Center, PO Box 3408, South Hackensack, NJ
  07606 3408. Telephone: (800) 900 1135 (US toll free) or outside the US, +1 (201)
  680 6630 or visit the website atwww.adr.com/shareholder

ADR holders
  can get a copy of the annual report on Form 20-F, which is filed with the Securities
  and Exchange Commission in the USA from JPMorgan Chase Bank, N.A. Other shareholders
  can obtain a copy of the annual report on Form 20-F from Jonathan Williams in
  the group secretariat on +44 (0)1925 237000, or alternatively the report is
  available on the website. The combined annual report and form 20-F is filed
  with the Securities and Exchange Commission in the USA and can be found on its
  website atwww.sec.gov

Avoiding
  unsolicited mail The company
  is legally obliged to make its register of members available to other organisations.
  Because of this, you may receive mail you have not asked for. If you want to
  limit the amount of personally addressed unsolicited mail you receive, and you
  have a UK registered address, please write to the Mailing Preference Service,
  MPS Freepost LON20771, London W1E 0ZT, or register by telephoning +44 (0) 845
  703 4599 or online atwww.mpsonline.org.uk

If you
  have any further questions about your dividend or shareholding, please call
  the helpline on +44 (0) 870 600 3971 or visit the website.www.unitedutilities.com



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|         |  |                                  
|         |  |                                  
|         |  |                                  
|Glossary |  |                                  
|         |  |                                  



|                                   
|-----------------------------------
|A
      shares                     
|                                   
|Allotted                           
|                                   
|Called-up
      share capital      
|                                   
|Non-current
      liabilities      
|                                   
|Depreciation                       
|                                   
|Finance
      lease                
|                                   
|Employee
      share option        
|                                   
|Shareholders
      equity         
|                                   
|Financial
      year               
|                                   
|Non-current
      asset investments
|                                   
|Freehold                           
|                                   
|Freehold
      land                
|                                   
|Gearing                            
|                                   
|Investment
      income            
|                                   
|Finance
      expense              
|                                   
|Nominal
      value                
|                                   
|Ordinary
      share               
|                                   
|Pension
      scheme               
|                                   
|Profit                             
|                                   
|Reserves                           
|                                   
|Share
      capital                
|                                   
|Share
      premium account        
|                                   
|Shares                             
|                                   
|Shares
      in issue              
|                                   



|United
          Utilities Annual Report & Accounts 2006 | 127
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ITEM 19  EXHIBITS

1.1
      The articles of association of United Utilities PLC adopted at the annual
      general meeting on 29 July 2005.

2.1
      The deposit agreement between United Utilities PLC, J P Morgan and the
      owners and holders from time to time of American Depositary Receipts issued
      under the Deposit Agreement previously filed as an exhibit to the Registration
      Statement on Form F-6, Registration No. 333-8238. The Form F-6 filed for
      the programme was declared effective by the SEC on June 9th.

2.2
      Amended and restated trust deed dated 23 November 2005 relating to the €5
      billion (Euro 5,000,000,000) medium-term note programme between United
      Utilities PLC, United Utilities Electricity PLC, United Utilities Water
      PLC and the Law Debenture Trust Corporation p.l.c.

2.3 Other than as provided in
    exhibit 2.2, the total amount of long-term debt securities of United Utilities
    PLC authorised under any single instrument does not exceed 10 per cent of
    the total assets of the group on a consolidated basis. United Utilities PLC
    agrees to provide to the Securities and Exchange Commission, upon request,
    copies of any instruments that define the rights of holders of long-term
    debt of United Utilities that are not filed as exhibits to this annual report.

4.1
      Instrument of appointment by the Secretary of State for the Environment
      of North West Water Limited (now called United Utilities Water) as a water
      and sewerage undertaker under the Water Act 1989 updated as at 14 July
      2005.

4.2
      Modification of condition N of the conditions of appointment of every Water
      Undertaker and every Water and Sewerage Undertaker in England and Wales
      made on 20 September 2005 and coming into effect on 1 October 2005.

4.3
      Modification of the conditions of appointment of all Water and Sewerage
      Undertakers and all Water Undertakersmade on 11 September 2005 and coming
      into effect on 15 September 2005.

4.4 Electricity Distribution
    Licence  standard conditions previously filed as an exhibit to United
    Utilities PLC’s Annual Report on Form 20-F on 3 June 2005 and incorporated
    by reference into this Form 20-F.

4.5 Electricity Distribution
    Licence for Norweb plc (now called United Utilities Electricity)  standard
    licence conditions from 1 April 2005 previously filed as an exhibit to United
    Utilities PLC’s Annual Report on Form 20-F on 3 June 2005 and incorporated
    by reference into this Form 20-F.

4.6 Notice under Section 11A
    (2) & (3) of the Electricity Act 1989, proposing to modify the Electricity
    Distribution Licence previously filed as an exhibit to United Utilities PLC’s
    Annual Report on Form 20-F on 3 June 2005 and incorporated by reference into
    this Form 20-F.

4.7 Electricity Distribution
    Licence for United Utilities Electricity PLC amendment to special licence
    conditions effective 1 April 2005 previously filed as an exhibit to United
    Utilities PLC’s Annual Report on Form 20-F on 3 June 2005 and incorporated
    by reference into this Form 20-F.

4.8
      Notice dated 23 November 2005 under the Electricity Act 1989 regarding
      the modification of standard condition 4C of all the electricity distribution
      licences granted or treated as granted under sections 6(1)(c) of the Electricity
      Act 1989.

4.9
      Letter on behalf of the Secretary of State for Trade and Industry dated
      31 January 2006 modifying the standard licence condition 3 in accordance
      with section 177(1) if the Energy Act 2004.

4.10
      Notice dated 22 February 2006 to all holders of an electricity distribution
      licence regarding the modification of, and reasons for the decision to
      modify, the standard conditions of electricity distribution licences in
      accordance with the Electricity Act 1989.

4.11
      Notification dated 5 April 2006 under section 11A of the Electricity Act
      1989 modifying the standard conditions of electricity distribution licences.

4.12 Trust deed by and between
    United Utilities Electricity PLC and the Law Debenture Trust Corporation
    p.l.c. dated 3 August 1995 previously filed as an exhibit to United Utilities
    PLC’s Annual Report on Form 20-F on 25 June 2004 and incorporated by
    reference into this Form 20-F.

4.13 Indenture dated 17 June
    2003 by and between United Utilities PLC and Deutsche Bank Trust Company
    Americas, previously filed on Form 6-K on 17 June 2003 and incorporated by
    reference into this Form 20-F.

4.14 Indenture dated 25 March
    1998 by and between United Utilities PLC and Marine Midland Bank, previously
    filed as an exhibit to the registration statement on Form F-1 filed on 16
    March 1998 and amended on 20 March 1998, and incorporated by reference into
    this Form 20-F.

4.15 Two indentures dated 28
    July 1998 by and between United Utilities PLC and Marine Midland Bank, previously
    filed as an exhibit to the registration statement on Form F-1 filed on 17
    July 1998 and amended on July 21 1998, and incorporated by reference into
    this Form 20-F.

---



4.15 Executive directors’ service
    contracts for Simon Batey and Gordon Waters, previously filed as an exhibit
    to United Utilities PLC’s Annual Report on Form 20-F on 9 June 2003
    and incorporated by reference into this Form 20-F.

4.16 Executive director’s
    service contract for Charlie Cornish previously filed as an exhibit to United
    Utilities PLC’s Annual Report on Form 20-F on 25 June 2004 and incorporated
    by reference into this Form 20-F.

4.17 Executive director’s
    service contract for Tom Drury previously filed as an exhibit to United Utilities
    PLC’s Annual Report on Form 20-F on 3 June 2005 and incorporated by
    reference into this Form 20-F.

4.18
      Executive director’s
    service contract for Phillip Green.

4.19
      Rules of the United Utilities PLC Performance Share Plan previously filed
      as an exhibit to United Utilities PLC’s Annual Report on Form 20-F
      on 3 June 2005 and incorporated by reference into this Form 20-F.

4.20 Rules of the United Utilities
    International Performance Share Plan previously filed as an exhibit to United
    Utilities PLC’s Annual Report on Form 20-F on 3 June 2005 and incorporated
    by reference into this Form 20-F.

7.1
      Calculation of Ratio of Earnings to Fixed Charges.

8.1 A list of all principal
    operating subsidiaries is contained in note 13 to the consolidated financial
    statements.

9.1
      Consent of Deloitte & Touche LLP.

12.1
      Certifications pursuant to section 302 of the Sarbanes-Oxley Act 2002.

13.1
      Certifications pursuant to section 906 of the Sarbanes-Oxley Act 2002.

CERTIFICATIONPursuant to the requirements of
Section 12 of the Securities and Exchange Act 1934, the registrant hereby certifies
that it meets all the needs of the requirements for filing on Form-20F and that
it has duly authorised the Undersigned to sign this annual report on its behalf.

United Utilities PLC
  Registrant

/s/...Philip Green
  Philip Nevill Green
  Chief executive officer
  Dated: 15 June 2006

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