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Securities and Exchange Commission
Washington, D.C. 20549



|FORM 20-F/A                                                                               
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|Commission
    file number: 82-1-14744                                                    
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|United
            Utilities PLC(Exact
    name of Registrant as specified in its charter)
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|England(Jurisdiction
    of incorporation or organisation)                                
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|Dawson
    House, Great Sankey, Warrington, WA5 3LW, England                              
|(Address
    of principal executive offices)                                              
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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: 561,572,377 (as of 31 March 2005). A shares of £0.50
each: 309,286,997 (as of 31 March 2005).

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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United Utilities PLC is filing
      this Form 20-F/A to correct certain of the US GAAP reconciliations included
      in its 2005 Annual Report on Form 20-F, which it filed on 3 June 2005.
      The corrections were identified as part of the group’s transition
      to International Financial Reporting Standards. The changes made are as
      follows:
  
      The reinstatement of liabilities
            in the US GAAP balance sheet that have yet to be legally extinguished,
            which had a consequential impact on taxes. These changes appear in
            Note 37 of the consolidated financial statements on pages 85 and
            86 (including note d), and in the US GAAP selected consolidated financial
            data on pages 94 and 97 (note 13).
      The adjustment to the fair
            value of certain highly complex derivative financial instruments,
            which had a consequential impact on taxes. These changes appear in
            Note 37 of the consolidated financial statements on pages 85, 86
            and 88 (note h),and in the US GAAP selected consolidated financial
            data
            on pages 94 and 97 (note 13).
      The amendment to enhancement
            expenditure classified as infrastructure renewals, which had a consequential
            impact on reported depreciation of infrastructure assets and taxes.
            These changes appear in Note 37 of the consolidated financial statements
            on pages 85 and 86, and in the US GAAP selected consolidated financial
            data on pages 94 and 97 (note 13).United Utilities has not otherwise
      amended its 2005 Annual Report on Form 20-F in any respect and, except
      as identified above, this report is presented as of 3 June 2005, when it
      was originally filed.


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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Introduction                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
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| | 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 Your Communications are
      to Your 
      Communications Group Limited and subsidiaries, to Eurocall are
      to Eurocall 
      Holdings Limited and subsidiaries, 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, 
      and to Vertex are to Vertex Data Science Limited which are all
      wholly owned 
      subsidiaries of the company.
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| | References
        are also made to specific terms which bear the following meanings:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
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| |  | Megawatt
      (MW)       |  | a megawatt is a unit of power equal to one millionwatts.                                        
| | - | --------------------------- | - | ------------------------------------------------------------------------------------------------
| |   |                             |   |                                                                                                 
| |  | Gigawatt
      (GW)       |  | a gigawatt
      is a unit of power equal to one billion(one thousand million) watts.           
| |   |                             |   |                                                                                                 
| |  | Gigawatt-hour
      (GWh) |  | one gigawatt-hour
      represents one hour of electricityconsumption at a constant rate of 1GW.
| |   |                             |   |                                                                                                 
| |  | Kilowatt
      (kW)       |  | a kilowatt
      is a unit of power equal to one thousandwatts.                                 
| |   |                             |   |                                                                                                 
| |  | Kilovolt
      (kV)       |  | a kilovolt
      is a unit of electrical potential equal to1000 volts.                          
| |   |                             |   |                                                                                                 
| |  | Megalitre
      (Ml)      |  | one megalitre equals
      one million litres.                                                  
| |   |                             |   |                                                                                                 
| |  | Microgram
      (ug)      |  | a microgram is one
      millionth of a gram.                                                   

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| | 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 web site address is www.unitedutilities.com.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
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| | 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. 2004/05) are to the 12 months ended on 31 March of
      that 
      year. Unless otherwise indicated, the financial information contained in
      this 
      report has been prepared in accordance with accounting principles generally
      accepted in the United Kingdom (UK GAAP). Note 37 to the consolidated 
      financial statements (pages 85 to 92) contains reconciliations from UK GAAP
      of 
      net income, shareholders equity and the companys financial position
      to 
      accounting principles generally accepted in the United States of America
      (US
      GAAP). Unless otherwise indicated, a reference in this report to consolidated
      
      financial statements is to the audited consolidated financial statements
      of the 
      company (together with accompanying notes) prepared at the end of each 
      financial year. Unless otherwise indicated, financial information for the
      group 
      included in this report is presented on a consolidated basis and references
      to 
      turnover (revenue) with respect to a business segment are to
      the gross
      turnover of such a segment (i.e. including share of joint ventures).
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| | This
        is the report and accounts and Form 20-F of United Utilities PLC for the
        
        financial year ended 31 March 2005. It contains the annual report and
        accounts 
        in accordance with UK generally accepted accounting principles and 
        regulations 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 2005 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 managementand advisorsNot applicable
        -Item 2  Offer
              statistics and expected timetableNot applicable
        -Item 3  Key
              informationSelected
                financial data
        93-97Risk
                factors
        29-31Item
                4  Information on the company
        4-14History
                and development of the company
        4Business
                overview
        4-14Organisational
                structure
        4Property,
                plant and equipment
        13Item 5  Operating
              and financial review and prospects
        3,
                  15-29Executive
                overview
        2-3Operating
                and financial performance review
        15-22Liquidity
                and capital resources
        22-25Research
                and development, patents and licences
        28Off-balance
                sheet arrangements
        25Contractual
                obligations
        23-24Safe
                harbor
        29Item 6  Directors,
              senior management and employeesDirectors
                and senior management biographies
        33-34Compensation
        37-48Non-executive
                directors terms of appointment
        37-38Executive
                directors contracts of service
        48Remuneration
                committee
        37Audit
                committee
        52Employees
        35Directors'
                share interests
        35-37Employee
                involvement and employee share schemes
        37Item 7  Major
              shareowners and related party transactionsMajor
                shareowners
        36Related
                party transactions
        84Item 8  Financial
              information (see Item 17)Differences
                in UK/NYSE corporate governance practices
        49-54Dividends
        98Litigation
        31Significant
                changes
        28Item 9  The
              offer and listingHistory
                of stock price
        103Markets
        4Item 10  Additional
              informationMemorandum
                and articles of association
        100Material
                contracts
        99Exchange
                controls
        99Taxation
        101-102Documents
                on display
        103Subsidiary
                information
        70


PagesItem
                11  Quantitative and qualitativedisclosure
                about market risk
        23-24Item 12  Description
              of securities otherthan equity securitiesNot applicable
        -Item 13  Defaults,
              dividend arrearages and delinquenciesNone
        -Item 14  Material
              modifications to the rightsof security holders
              and the use of proceedsNoneItem
                15  Controls and procedures
        51Item 16  [Reserved]
        -Item
                16A  Audit committee financial expert
        52Item
                16B  Code of ethics
        32Item
                16C  Principal accountant fees and services
        53Item 16D  Exemptions
              from listing standardsfor audit committeesNot applicableItem 16E  Purchases
              of equity securitiesby the issuer and
              affiliated purchasersNot applicable
        -Item 17  Financial
              StatementsReport
                of independent registered public accounting firm
        55Consolidated
                profit and loss account
        56Balance
                sheets
        57Consolidated
                cash flow statement
        58Reconciliation
                of net cash flow to movement in net debt
        58Statement
                of total recognised gains and losses
        58Reconciliations
                of movements in equity shareholders' funds
        59Notes
                to the accounts
        60-84Summary
                of differences between accounting principles generally accepted
                in the United Kingdom and the United States of America
        85-92Item
                18  Financial statementsNot applicable
        -Item
                19  Exhibits
        107-108


|United
            Utilities Annual Report & Accounts 2005
|----------------------------------------------------------

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Chairmans review    Strong results, which
  demonstrate the success
  of the groups strategy  PerformanceI am pleased
    to report another strong set of results. Turnover (including share of joint
    ventures) rose 11.9 per cent to £2,368.2 million, reflecting growth
    across all businesses. Total operating profit increased 10.7 per cent to £645.9
    million compared with last year. This increase reflects improved segmental
    operating profits** in licensed multi-utility operations, infrastructure management
    and business process outsourcing, and reduced segmental operating losses**
    in telecommunications. DividendThese results
    further demonstrate the success of our strategy, to improve the efficiency
    of our regulated businesses and to achieve growth in our support services
    businesses. In line with our target to maintain dividends in real terms, the
    board is proposing to increase the final dividend by 2.5 per cent. Subject
    to shareholders approval at the annual general meeting, the final dividend
    for the year ended 31 March 2005 of 30.63 pence per ordinary share and 15.315
    pence per A share will be paid on 26 August 2005 to shareholders on the register
    at the close of business on 10 June 2005. PeopleWe were pleased
    to welcome David Jones and Nick Salmon to the board as non-executive directors
    earlier this year. Much of Davids career was spent in the utility sector,
    latterly as chief executive of National Grid. Nick is currently chief executive
    of Cookson Group plc and has considerable experience of the energy infrastructure
    sector. With their respective backgrounds, I have no doubt that both will
    add to the quality of board debate. In addition, it was particularly
    pleasing to welcome Tom Drury as an additional executive director. Tom has
    led Vertex to become one of the leading business process outsourcing companies
    in the UK and, before that, he held other senior management positions in the
    group. Finally, I wish to place
    on record the boards sincere thanks to John Seed who will retire at
    the next annual general meeting, having completed three three-year terms of
    office. In particular, John has ably chaired the remuneration committee for
    many years and his experience and sound judgement will be greatly missed by
    his board colleagues.




Looking forwardLooking to
     the future, and following the conclusion of our regulatory reviews, the
    board
    has set a target of maintaining dividends in real terms over the next five-years.
     This target is dependent upon the groups regulated business at least
     meeting  its cost savings targets, and its non-regulated businesses continuing
     to perform
    at least in line with current levels. On behalf of the board,
    I want to acknowledge and thank all our staff for their commitment and hard
    work in achieving these results.  Sir Richard EvansChairman        **
      segmental
        operating profit/loss is defined as total operating profit before goodwill
        amortisation and exceptional items for a segment as shown in the segmental
        analysis by class of business in note 2 of the consolidated financial
        statements.




|2 | United Utilities Annual
      Report & Accounts 2005
|- | ----------------------------------------------------

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Operating and financial reviewChief executives overview    Progress in our support
  services businesses has
  been excellent  Business performanceThis set of
    results is a further milestone in the implementation of our strategy, which
    we put in place over five years ago. Progress in our support services businesses
    has been excellent. We have now established United Utilities Contract Solutions
    as the UKs leading utility infrastructure outsourcing business, and
    Vertex as the third largest business process outsourcing company in the country. In addition to good profit
    growth in our licensed multi-utility operations business, we accepted the
    final price determinations for both our water and electricity businesses in
    December. Although the efficiency targets set are demanding, the final proposals
    allow almost £350 million more revenue than the initial draft determinations,
    reflecting welcome movement on the part of the regulators in response to our
    representations. Having made preparations in advance of receiving these proposals,
    we have plans in place which we believe meet the challenges set for us. The second stage of
        our  rights issue, which is due later this month, will make an important
        contribution
    to the funding of our regulated capital investment programmes over the 2005-10
         period. In addition to the £2.9 billion programme that was set
         out in its final determination, United Utilities Water is expecting
         to spend
    approximately
    another £200 million as a result of carry-over of obligations funded
     during the previous regulatory period. Furthermore, we estimate that there

    is potential for up to approximately £500 million of additional investment
     relating to projects that were not part of our regulatory contract for 2005-10.

    Including United Utilities Electricitys £640 million investment
     programme, our regulated businesses could be required to spend over £4
      billion on capital investment over the next five years. Our non-regulated businesses
    now contribute over 40 per cent of the groups external revenues, and
    for the first time have generated more than £100 million of operating
    profit** in a single year. During the past twelve months, they have also secured
    a number of substantial new contracts with an expected total value of around
    £3.3 billion. Recent significant deals
    include a fifteen-year £1.5 billion contract renewal with Dwr Cymru
    Welsh Water, and a five-year contract win with Southern Water, which is worth
    around £750 million to the consortium in which we are a major partner.
    Including our own operations in the north west of England and our ongoing
    contract to manage Scottish Waters capital investment programme, United
    Utilities is involved in the operation or management of assets for four water
    companies in the United Kingdom, representing around 35 per cent of the industrys
    asset base. This means we can target significant economies of scale, particularly
    through the procurement of materials and services and the transfer of best
    operational practice between the group and its partners. Having recently signed
    an eight-year £1.1 billion contract to operate




the north of England gas
  distribution network, the contract successfully commenced on 1 June, with around
  1,100 employees transferring from National Grid Transco to United Utilities.
  The network of around 36,000km provides gas to more than six million people
  across the region. During May, Vertex completed
    the acquisition of Marlborough Stirling, a provider of outsourcing services
    and technology to clients in the financial services sector, to give Vertex
    an entry point into this market. We believe that Marlborough Stirling has
    significant untapped potential that can be unlocked by combining its sector
    specific knowledge with Vertexs expertise in business process outsourcing.
    We have identified immediate opportunities to deliver efficiencies of around
    £6 million per annum, on a full-year basis, from the acquisition, mainly
    derived from a reduction in central overheads. Despite difficult market
    conditions, our telecommunications business, Your Communications, substantially
    reduced operating losses** in the year and achieved break-even** in the second
    half of the year. Our strategy for Your Communications remains unchanged.
    We are continuing to develop the business with a view to its disposal when
    shareholder value can be maximised. OutlookWith prices
    in our water and electricity businesses now fixed for the 2005-10 period,
    and with plans in place which we believe will meet our operating and capital
    efficiency targets, our regulated businesses benefit from some of the most
    predictable index-linked income streams over the next five years. Growth in earnings from
    our licensed multi-utility operations business is complemented by growth in
    our non-regulated activities. Having recently secured substantial new long-term
    contract wins with public and utility sector clients United Utilities Contract
    Solutions and Vertex have excellent prospects for the future. Looking forward
    public sector outsourcing potential looks promising, offering good further
    growth prospects for our support services businesses in the medium-term.  John RobertsChief executive ** Operating
        profit/loss is defined as total operating profit before goodwill amortisation
        and exceptional items for a segment as shown in the segmental analysis
        by class of business as shown in note 2 of the consolidated financial
        statements.




|United
      Utilities Annual Report & Accounts 2005 | 3
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Operating and financial reviewBusiness description

UNITED UTILITIES PLCUnited 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 also owns a telecommunications business through its
subsidiary Your Communications, which operates in the United Kingdom. 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;
   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,
United States of America, Canada and Australia; and
   United
           Utilities intends to continue to develop YourCommunications with a
           view to its disposal when shareholder value
can be maximised. 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. 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 14 to the consolidated financial statements on page 70. BUSINESS OVERVIEWThe group reports its results through four business segments. References to segmental operating profit/loss are defined as the total operating profit before goodwill amortisation and exceptional
items* for a segment as shown in note 2 of the consolidated financial statements. Total operating profit before goodwill amortisation and exceptional items* is reconciled to total operating profit in table 4 on page 15. * See discussion on page 15.


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|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------- | --------------------- | ------------------------------ | ----- | ------------------------ | --------------------- | - | ------- | ---------------------
|Table 1: Business
    Overview                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |          |                       |                                |       |                          |                       |   |         |                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Turnover |                       | Segmental
    operating profit |       | Net
    operating assets
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |          |                       |                                |       |                          |                       |   |         |                      
|Financial
    year ended 31 March 2005                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | £m       | per
    cent of
group |                                | £m    |                          | per
    cent of
group |   | £m      | per
    cent of
group
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |          |                       |                                |       |                          |                       |   |         |                      
|Licensed
    multi-utility operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 1,384.7  | 54.1                  |                                | 587.9 |                          | 85.0                  |   | 7,838.4 | 94.3                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |          |                       |                                |       |                          |                       |   |         |                      
|Licensed
            multi-utility operations comprise the regulated monopoly activities
            of United Utilities Water (wastewater and water) and UnitedUtilities
            Electricity (electricity distribution). These companies own the respective
            infrastructure network assets representing around 94 percent
            of the groups net operating assets at 31 March 2005. The businesses
            are capital intensive and are subject to both economic and environmental
            regulation. These businesses generate 85 per cent of the groups
            total operating profit before goodwill amortisation and exceptional
            items*, of which approximately three quarters is derived from wastewater
            and water and approximately one quarter from electricity
    distribution.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |          |                       |                                |       |                          |                       |   |         |                      
|Infrastructure
    management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 543.1    | 21.2                  |                                | 79.2  |                          | 11.4                  |   | 127.6   | 1.5                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |          |                       |                                |       |                          |                       |   |         |                      
|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 1.5 per cent
    of the groups net operating assets at 31 March 2005.                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |          |                       |                                |       |                          |                       |   |         |                      
|Business
    process outsourcing                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 396.4    | 15.5                  |                                | 26.4  |                          | 3.8                   |   | 155.5   | 1.9                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |          |                       |                                |       |                          |                       |   |         |                      
|Vertex
            is one of the UKs largest providers of business process outsourcing
            services. It seeks to exploit United Utilities business process management
            skills by providing a service to manage its clients customers
            in accordance with its contract. These activities employ only alimited
            amount of capital, representing 1.9 per cent of the groups
    net operating assets at 31 March 2005.                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |          |                       |                                |       |                          |                       |   |         |                      
|Telecommunications                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 233.6    | 9.1                   |                                | (5.1  | )                        | (0.7                  | ) | 236.8   | 2.8                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |          |                       |                                |       |                          |                       |   |         |                      
|Your
            Communications is a medium-sized alternative telecommunications provider
            with a dense network in the north of England, complemented by a lean
            national network. It provides voice, basic and advanced data communication
            services to the public sector, and small and medium-sized corporate
            customers, predominantly in central and northern England. Construction
            of the network infrastructure is now complete. These activities employ
            only a limited amount of capital, representing 2.8 per cent of the
            groups net
operating assets at 31 March 2005.                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |          |                       |                                |       |                          |                       |   |         |                      
|Note:
            Financial data for the year ended 2005 has been extracted from note
            2 of the consolidated financial statements, using the definitions
            set out therein. Full analysis for the last three years is contained
            within the note. Percentages are calculated based on the gross totals
            disclosed in note 2. In the above table, segmental operating profit
            as a per cent of group operating profit is calculated based on segmental
            operating profit/loss divided by total operating profit before goodwill
            amortisation and exceptional items*. Turnover and percentage of group
            turnover include turnover from joint ventures and are stated before
    inter-business eliminations.                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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    Utilities Annual Report & Accounts 2005
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LICENSED MULTI-UTILITY OPERATIONS
United Utilities North West manages the operation of the licensed wastewater and water network assets owned by United Utilities Water, and the electricity distribution assets owned by United
  Utilities Electricity, in north west England. These businesses involve 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 2005 was
£706.9 million (2004: £864.2 million, 2003: £590.6 million) with 52.5 per cent relating to the wastewater network (including sewage sludge treatment and disposal), 38.3 per cent to the water network, and 9.2 per cent to quality and
efficiency. Capital expenditure for the financial year 2005 relating to electricity distribution was £151.8 million (2004: £149.7 million, 2003: £122.3
million), 21.9 per cent was load related (enabling new connections to be made
to the network and increasing the amount of electricity able to be carried),
69.8 per cent was non-load related (for example, replacing assets due to statutory
obligations or replacing faulty or ageing equipment) and 8.3 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 to 31
           March 2005 the group spent £1.56 billion on environmental improvements
           across north west England.  During the financial year ended 31 March
           2005, the group made environmental improvements costing £399.9
           million, including £194.7 million on improving standards for
           wastewater and water treatment works and £106.2 million on
controlling pollution from storm-water overflows (or unsatisfactory combined
           sewer outflows referred to by the Environment Agency as Unsatisfactory
           Intermittent Discharges or UIDs).
Key outputs from the wastewater capital investment programme included, the refurbishment
of 2.0 kilometres of sewers, replacement of 5.0 kilometres of sewers, and the
addressing of 145 UIDs to achieve environmental improvements. Key outputs for
water included, the refurbishment of 815 kilometres of
old water mains and the replacement of some 28,016 lead communication pipes.
Water meters were also installed in 40,468 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. The environmental
           regulation of wastewater and water and the environmental regulation
           of electricity distribution
are described on pages 7 and 9 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 the customer relationship activities involved in supplying wastewater,




water and related products and services
to homes and businesses in north west England. It manages the sales, billing,
cash collection and debt management activities and systems for 3.1 million domestic
and business customers 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 to continually 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 customers for non-payment, customer relationship management is an
important
activity. At present, United Utilities North
West supplies around 18 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. 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 wastewater
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 two thirds of the end product
  is recycled to agricultural land as a soil conditioner or used in land reclamation
  and one third 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 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 absorption for certain waters. United Utilities
        Water monitors water quality by analysing samples regularly for both
        microbiological and chemical parameters. In the calendar year 2004, the
        business


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    Annual Report & Accounts 2005 | 5

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Operating and financial reviewBusiness description continued

continued to improve quality, with
99.86 per cent of drinking water samples meeting the quality standards at customers taps,
compared with 99.82 per cent the previous year. Treated water is delivered to the end customer through a network of large diameter trunk mains, trunk and distribution mains, service reservoirs and water towers. 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 Director General of
  Water Services (the water regulator), supported by the Office of Water Services (Ofwat).
  The water regulator also exercises powers under UK competition legislation, most
  significantly the Competition Act 1998 and the Enterprise Act 2002. The WA 2003
    is expected to be fully implemented by spring 2006 and is intended to promote
    greater water conservation and planning for the future by water companies
        (contributing to the achievement of sustainable development),
    revise the framework for water abstraction and impounding, and help to build
    a more transparent regulatory environment. The WA 2003 also aims to extend opportunities
for competition in the water industry in England and Wales, by introducing a
new framework for the licensing of water supply. Ofwat anticipates that, from
Autumn 2005, water supply licensees will be able to provide both retail supply
(i.e. the supply of water purchased from a water undertaker 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. 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) has also been
reduced from 100 to 50 megalitres. 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
Act and the company welcomes the new competitive developments in this
field. The WA 2003 provides for the establishment
of a regulatory board to be known as the Water Services Regulation Authority
(the water authority) which will replace the individual Director
 General as the water regulator. It is intended that the water authority will
be set up on 1 April 2006. This brings the water industry in line with other
regulated industries whose regulators have been moved to a similar board structure.
Appointments to the water authority 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 current water regulator, Philip Fletcher, was appointed to the
post on 1 August 2000 for a fixed term of five years. The chairman of the water
authority will continue to be 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) will replace WaterVoice (previously the water regulators
National Customer Council and the regional Customer Service
Committees).




The council is expected to come into being on 1 October 2005. The water regulator
        must comply with the statutory duties set out in the Act. He may receive
        guidance from the UK government in areas such as social and environmental
        policy and its views on his approach to price setting, and in the performance
        of his statutory functions he is required to exercise judgement. However,
        he is not subject to direction about what those judgements
  should be and is independent of government ministers. Under the Act, the water
        regulator is (and the water authority will be) required to exercise and
        perform his powers and duties in the manner that he considers is best
        calculated to: 
   further the consumer objective (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 the water regulator enforces, along with licensees principal duties under the Act. Licence conditions can be modified by the water regulator,
either with the water undertakers agreement or following reference to the
Competition Commission for 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 restricts its conduct in a number of ways. These restrictions include prohibitions on undue preference or discrimination between customers, restrictions on the
declaration and payment of dividends, and on cross-subsidies between United Utilities Water and associated companies. United Utilities Waters licence requires that it declares or pays dividends only in accordance with a written dividend policy
of the directors of the company, which has been accepted by the water regulator as not impairing its ability to finance its business. United Utilities Water must obtain the consent of the regulator before lending funds to an associated company. Any
other transactions between United Utilities Water and an associated company are required to be at arms
length. Any such transactions would undergo a process of market-testing, or involve
the associate 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. 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
the
water regulator). The WA 2003 has also introduced financial penalties for breach of licence conditions and other key duties to bring the industry in 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.


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    Utilities Annual Report & Accounts 2005

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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 the water
    regulator is satisfied that a licensee is in breach of the conditions of its
    licence, he 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, the regulator 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. The water regulator
        regulates wastewater and water charges by capping the average increase
        in charges
  that a company can impose in any year. The water regulator 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 (RPI) 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, together with the scope for it to improve its efficiency. 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
           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 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 recent price review, the water regulator 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
      6.4per
      cent2007/08
      4.4per
      cent2008/09
      3.5per
      cent2009/10
      3.0per
      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 the water regulator. This
  process, known as logging up and down, allows prices to be adjusted
  up or down at the next periodic review to compensate for the unexpected change.
  In addition, where the change exceeds the specified materiality thresholds the
  company can request, and the water regulator can instigate, a re-setting of
  its price limit during the five-year period, known as an interim determination
  of K (IDoK). United Utilities Water successfully obtained permission from
  the regulator, through the IDoK process, to increase its charges for 2004/05
  by a further 4.4 per cent. In the case of adjustments to the




quality improvement
  programmes (in particular, the environmental programme), Ofwat published specific
  guidance in December 2004 as to the principles and outline procedures that must
  be complied with in order to obtain confirmation, and recognition in future
  price limits, of changes to the funded programme. 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. With effect from the last price review, this clause was included in
  United Utilities Waters licence, allowing appropriate adjustment for unforeseen
  events both adverse and favourable. Environmental regulation
    of wastewater and waterThe
     wastewater and water 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 wastewater and water. 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 Acts

    1989 and 2003, 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 Environment 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, 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:
      The
        WA 2003, which makes new water abstraction licences time limited and unused
        licences more easily able to be revoked or varied without compensation,
        and which make damages claimable 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. 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




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      Utilities Annual Report & Accounts 2005 | 7
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Operating and financial reviewBusiness description continued

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 40,000 of its lead communication pipes in
      the period 1 April 2005 to 31 March 2010 (known as AMP4) and
      expects to replace a further 109,000 as part of its routine maintenance
      programme. 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 Treatment 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  reply given by the United Kingdom is under technical assessment.
        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 these deliberations, 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. 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. 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 introduce
  a new Bathing Water Directive with more stringent microbiological standards,
  and 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. A decision of the
  High Court in London in May 2003 (Hounslow LBC v Thames Water), that complaints
  of odour from wastewater




treatment works
  could enable enforcement action under the statutory nuisance provisions of the
  Environmental Protection Act 1990, increased the risk and cost of such measures.
  Ofwats final determination of December 2004 allows United Utilities Water
  expenditure of £29 million to deal with odour, of which £11 million
  relates to activity at three of its treatment works. It is also expected that
  a voluntary code of practice on such odour problems will be introduced during
  2005. As part of the five-year
  periodic review of prices, the water regulator 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 its 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 on 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
  2005, 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. Excluding the impact
  of any exceptional events, for example the storms experienced in January 2005
  affecting Cumbria and Lancashire in the northern part of north west England,
  the average number of interruptions per 100 consumers per annum was 47.93+,
  exceeding the regulatory target for the year of 54.8. The average number of
  minutes for which consumers were without supply was 52.0+, beating the
  regulatory target for the year of 68.2 minutes. (Figures in this paragraph
  denoted by + are as yet unaudited by Ofgem). Economic regulation
    of electricity distributionThe
    electricity industry in Great Britain is regulated under the Electricity Act
    1989 (the Electricity Act) and the Utilities Act 2000 (the Utilities
    Act) by the electricity regulator. The electricity regulator 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 the electricity regulator. The electricity regulator also exercises powers
    under UK competition legislation, most significantly the Competition Act 1998
    and the Enterprise Act 2002. The electricity
  regulator comprises a board, 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. The electricity
  regulator must comply with the statutory duties laid down in the Electricity
  Act as amended by the Utilities Act. In doing




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so, the electricity regulator
  may receive guidance from the UK government in areas such as social and environmental
  policy. In carrying out its statutory duties, the electricity regulator 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 the electricity
  regulator may only be removed from the post for incapacity or misbehaviour. The primary duty
         of the electricity regulator is to protect the interests of consumers,
        wherever
  appropriate, by promoting effective competition. In carrying out this duty,
        the  electricity regulator 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
  which 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 2.2 million consumer
  premises. The licence imposes
    restrictions. In particular, the disposal of any part of the distribution
    system is restricted and distribution businesses must provide services on
    non-discriminatory terms. Cross-subsidies to or from United Utilities Electricitys
    licensed business are prohibited, and the board of directors of United Utilities
    Electricity must provide a certificate of compliance before declaring dividends
    or making distributions affirming that the directors are satisfied that it
    is in compliance with relevant licence obligations and that the making of
    the distribution will not cause it to be in material breach of any of the
    obligations in the future. United Utilities Electricity must also obtain the
    consent of the regulator before lending funds that are not on an arms
    length basis or engaging in any other transaction not on an arms length
    basis with its affiliated companies. In general, electricity distribution
    licences contain strict provisions to maintain and ring-fence the financial
    and management resources of the licensed businesses. The licence contains
    various conditions regulating the conduct of the business. Licence conditions
    can be modified by the electricity regulator 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 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 the electricity regulator. 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 (see above). The electricity
  regulator is currently consulting 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. A decision is expected to be taken on the amendments later in 2005. 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 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. Companies are also incentivised
  to provide a high quality of service,




and penalised if
  they provide a poor quality of service through the price review process, by
  means of an adjustment at the subsequent price review. The electricity
         regulator regulates electricity distribution charges by capping the
        average
  increase in charges which a company can impose in any year. The electricity
         regulator 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 (RPI) 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. The electricity
    regulator 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 the electricity regulator. 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, the electricity regulator is able to impose fines on companies
    who fail to achieve the guaranteed standards or who are in breach of other
    licence obligations. In practice, many
  regulatory issues arising between licensees and the electricity regulator are
  settled without the need to resort to formal proceedings. However, where the
  electricity regulator 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 the
  electricity regulator may revoke the licence. An incentive scheme
  was introduced by the electricity regulator in April 2002 which provided greater
  focus on three specific service areas: number of interruptions to customers
  supplies; length of these interruptions; and quality of the telephone response
  to customers. The electricity regulator 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 these areas will continue to be incentivised. Under the scheme,
  United Utilities Electricity is subject to annual rewards and penalties depending
  on its performance against pre-specified targets. Both rewards and penalties
  under the incentive scheme are capped at 3.0 per cent of annual revenues. 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 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




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      Report & Accounts 2005 | 9
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**Operating
  and financial review****Business description continued**

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 2005-2010. 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 leukaemia, 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 United Kingdom, 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, 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
    leukaemia 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 leukaemia in children but the epidemiological evidence
    is currently not strong enough to justify a firm conclusion that such fields
    cause leukaemia 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. United Utilities
    Electricity, in line with other Energy Networks Association (ENA) member companies,
    carries out its activities in accordance with Health Protection Agency guidance.
    The ENA is the trade association for electricity companies in the United Kingdom.
    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 MANAGEMENTDuring the financial
  year ended 31 March 2005, United Utilities Contract Solutions underwent a business
  reorganisation and now has three 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. Disposal of Green
  EnergyDuring
  the financial year, United Utilities Contract Solutions sold its




Green Energy business
  for £63 million in cash. This business had been responsible for the development
  and operation of renewable energy generation projects. Utility SolutionsThe business develops
  and operates contracts in the UK utility market and services over 5.2 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 successfully renegotiated
  a new operations and maintenance contract for up to 15 years, continuing the
  relationship with Dwr Cymru Welsh Water following the expiry of the first contract
  on 31 March 2005. Under the new contract, the business will provide water and
  wastewater services in north Wales, and water services in south Wales. The business
  will also provide 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 services over 7.3 million people outside the UK. The aim of the business
  is to focus on extending the current portfolio of contracts in target areas,
  including Australia and central and eastern Europe, securing long term investment
  returns and operational sources of income while managing the overall exposure
  arising from the contracts. 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 March 2005, the
  Philippine concession company successfully listed on the Philippine Stock Exchange.
  The International business participated in this process by placing part of its
  total shareholding in the business, reducing its stake to 11.7 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 24 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 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, and 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.


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      Utilities Annual Report & Accounts 2005

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Industrial
            and Commercial SolutionsIndustrial and Commercial
  Solutions is comprised of four distinct businesses:- •
    Industrial
       this business is a provider of specialist water and wastewater services
      to industry in the UK. In many instances, wastewater 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. United Utilities
      Industrial currently treats approximately 13 million tonnes of wastewater
      a year.•
    Metering
       the Metering business provides installation and maintenance services
      for electricity, water and gas meters. In the financial year ended 31 March
      2005, the business installed 75,000 new water meters and installed or exchanged
      169,000 electricity meters in north west England. In addition, 354,000
      gas
      meter installations were carried out under a contract with British Gas
      Trading. Services under this contract commenced in November 2002. In May
      2004 a revised
      contract was agreed, which extended the contract for a further year 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 (in which the
      group has a 50 per cent interest), and which owns the meter assets.•
    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. The
      business
      has continued to pursue its strategy of expanding beyond north west England
      and won £15.6 million of orders out-of-area in the financial year
      ended 31 March 2005.•
    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. The Energy Services business provides energy
      efficient infrastructure, for example lighting, to customers. BUSINESS PROCESS
  OUTSOURCINGVertex is a
  leading UK provider of business process outsourcing services and one of the
  UKs major customer management service suppliers. It undertakes long-term
  contracts with clients to handle administrative functions, such as billing and
  dealing with customer enquiries. It operates in the commercial, utility, central
  and local government sectors. Vertex administers and manages the various processes,
  based on defined and measurable performance criteria. Vertex commenced
         trading in the UK in 1996. It entered the Canadian market in March 2002
        and
  is expanding its capabilities into the business process outsourcing market
        in  North America. In March 2004, Vertex purchased a US debt collection
        agency,
  First Revenue Assurance LLC, based in Colorado. In May 2005, Vertex completed
         its acquisition of Marlborough Stirling plc, a provider of outsourcing
        services
  and technology to clients in the financial services sector. Capital expenditure
  in the year ended 31 March 2005 was £15.6 million (2004: £20.4 million,
  2003: £34.8 million). TELECOMMUNICATIONS
  Your CommunicationsYour Communications
  offers a range of fully integrated communications services  voice, data,
  mobile and internet  to the public sector and small and medium-sized corporate
  customers predominantly in central and northern England. It is focused on delivering
  complete communications packages, tailored to fit specific business needs, and
  wholesale products for resellers and other operators. Capital expenditure in
  the year ended 31 March 2005 was £11.1 million (2004: £9.4 million,
  2003: £21.1 million).




During the financial
           year ended 31 March 2005, Eurocall Limited (an independent provider
          of telecom
    services to the small and medium-sized enterprise market, the acquisition
           of which was announced in March 2004, was successfully integrated
          into Your
    Communications business with £9 million of synergies achieved. The construction
    of Your Communications network was completed in 2002/03 and the group
    reviewed the carrying value of its telecommunications assets, in accordance
    with Financial Reporting Standard (FRS) 11. As a result, an adjustment
    to value of £25.5 million was made during the financial year ended 31
    March 2003. Under the obligations of FRS 11 to continually review the carrying
    value of the assets, it was concluded that no further adjustment to value
    was necessary for the year ended 31 March 2005. Your Communications
  focus remains on growth in sales, becoming cash generative and progressing towards
  profitability. The business substantially reduced segmental operating losses
  in the year and achieved break-even in the second half of the year ended 31
  March 2005 . The business will continue to be developed with a view to disposal
  when the shareholder value can be maximised. Telecommunications
        regulationAs from 25
  July 2003, Your Communications has been regulated in accordance with the Communications
  Act 2003 (the CA 2003). The CA 2003 incorporated into UK law the
  requirements of the European Union Communications Directives and created a new
  regulatory framework of electronic communications networks and service providers.
  Regulation of the telecommunications industry in the UK became, with effect
  from 29 December 2003, the responsibility of the Office of Communications (Ofcom)
  as a unified regulator replacing the Director General of Telecommunications
  (and the four other communications industry regulators). For Your Communications,
    the most significant operational change has been the withdrawal of the Telecommunications
    Act 1984 licensing regime. Previous licensing requirements were replaced by
    a general authorisation regime with general conditions of entitlement, which
    apply to all communications providers (the General Conditions),
    and specific conditions which apply only to individuals. The General Conditions
    set out the general authorisation provisions that apply to Your Communications
    as a communications provider. The General Conditions are intended to ensure
    that the communications provider provides communications services (which include
    the running of a telecommunications network) in a manner safe to the public
    and also that it adheres to a minimum set of consumer protection measures,
    such as retail price publication and independent dispute resolution for customers
    with ten employees or fewer. The General Conditions also contain an obligation
    on the part of a communications network provider to negotiate with other network
    providers with a view to concluding an agreement (or an amendment to an existing
    agreement) for interconnection within a reasonable period. Either party to
    a negotiation of an interconnection agreement can refer a dispute to Ofcom
    for resolution. Furthermore, Ofcom
  is required under the CA 2003 to carry out a series of reviews of economic markets
  to identify communications providers with significant market power. Ofcom has
  designated Your Communications as having significant market power in the market
  for fixed geographic call termination on its own network. Your Communications
  is therefore required to provide network access (that is, fixed geographic call
  termination services) to other communications providers and to do so on fair
  and reasonable terms. Your Communications is not subject to any price controls
  in this or any other economic market identified by Ofcom. Ofcom is currently
  undertaking a strategic review of the UK telecommunications industry. A consultation
  document setting out Ofcoms proposals for its future regulatory strategy
  was published in November 2004. The main principle identified by Ofcom was the
  need to ensure equality of access to British Telecommunications UK-wide
  network. The final phase of the review is expected in the second quarter of
  2005. Your Communications has responded to


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|United
      Utilities Annual Report & Accounts 2005 | 11

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**Operating
  and financial review****Business
  description continued**

Table 2: People
   key contributors to corporate success

|Number
      of employees  Financial year ended 31 March             | 2005   |  | 2004   |  | 2003  
|--------------------------------------------------------------------- | ------ |  | ------ |  | ------
|                                                                      |        |  |        |  |       
|Licensed multi-utility
      operations                               | 4,889  |  | 4,684  |  | 4,269 
|Infrastructure
      management                                       | 2,510  |  | 2,381  |  | 2,163 
|Business process
      outsourcing                                    | 7,693  |  | 7,746  |  | 6,540 
|Telecommunications                                                    | 682    |  | 709    |  | 681   
|Other activities                                                      | 161    |  | 154    |  | 149   
|                                                                      |        |  |        |  |       
|Average number
      of persons employed by the group during the year | 15,935 |  | 15,674 |  | 13,802
|                                                                      |        |  |        |  |       
|                                                                      |        |  |        |  |       

the consultation
  request both directly and through its membership of the UK Competitive Telecommunications
  Association. Your Communications
  broadband wireless access licences in the UK were awarded under the Wireless
          Telegraphy Acts 1949 and 1998, which authorise the use of radio equipment
          and
  frequencies and prescribe the conditions under which that equipment may be
          used to provide broadband wireless access services on a regional basis.
          Ofcom may
  recover part, or all, of the spectrum allocated to the licensee if it appears
          that consumer interests are not being met. The licences will remain
          in force
  until the end of 2015 unless revoked earlier by Ofcom, under specified and
          limited circumstances, or surrendered by the licensee. There has been concern
    in the UK over the possible health effects of radiowaves emitted by base stations
    and mobile phones. The report by the Independent Expert Group on Mobile Phones,
    commissioned by the UK government, was published in May 2000. It stated that
    the balance of evidence indicated that exposure to radio frequency radiation
    below national and international guidelines does not cause adverse health
    effects to the general population, but that there may be biological effects.
    It recommended that a precautionary approach be taken. The UK governments
    response to the report includes the publication of revised planning policy
    guidance on telecommunications, and the introduction of a requirement that
    applications to erect base stations with masts of 15 metres or under should
    be subject to the more rigorous public consultation procedures that apply
    to masts over that size.Research
    is continuing into the possible health effects of base stations and mobile
    phones. Following the publication of the report by the Independent Expert
    Group on Mobile Phones, a research programme, called the Mobile Telecommunications
    and Health Research Programme, was set up in February 2002 to look into the
    possible health impacts of mobile telecommunications. Public concern about
    this matter could lead to a decrease in the demand for Your Communications
    services. PEOPLE  KEY
  CONTRIBUTORS TO CORPORATE SUCCESS(See
  table 2) 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 operating across the sectors in which it operates. A statement
  of principles underpins 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 a working together in partnership agreement. Work is continuing
      to consolidate multiple legacy agreements into a consistent set of simplified,
      standardised and contemporary terms and conditions. Working closely with
      five trade unions, a programme of partnership working for employee representatives
      and managers has developed, covering human resource practice, behaviour
      and




business
      knowledge. This has been funded in part by the Department of Trade and Industry.•
    Infrastructure
      management  trade union involvement in United Utilities Contract Solutions
      increased significantly as a consequence of the Welsh Water contract, where
      the workforce was heavily unionised. Around 95 per cent of employees in
      Wales remain covered by collective bargaining arrangements. In the Industrial
      and Commercial Solutions business 70 per cent of its workforce are covered
      by collective bargaining arrangements but, in the remainder of United Utilities
      Contract Solutions, (with the exception of a limited number of employees
      within United Utilities Industrial), employees are employed on personal
      contracts and are not covered by collective agreements. During the first
      half of 2005/06, United Utilities Contract Solutions will increase its headcount
      by around 2,500 through the transfer of staff into the business from Thurrock
      Unitary Council, Southern Water and National Grid Transco. The majority
      of those transferring will have their terms and conditions governed by collective
      agreements with trade unions.•
    Business
      process outsourcing  around 50 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.•
    Telecommunications
       26 per cent of the Your Communications workforce is covered by collective
      bargaining arrangements. The groups
  employees are key to achieving the business strategy and enhancing shareholder
  value. A review of key employee and safety issues arising in the year is contained
  within the Corporate Responsibility Review on page 32. 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 characteristic of a large multi-utility. As in previous years,
  the majority of accidents at work resulted from manual handling activities and
  slips, trips and falls. There are already specific programmes in
  place to manage these risks, together with improved absence management arrangements.
  As the business develops, the risk profile is continually monitored and the
  risks arising from the transition are managed appropriately. In this context,
  the group works collaboratively with clients, contractors and partners in joint
  ventures, sharing experience and best practice. The group met last years
  short-term published health and safety targets. The groups
  risk management procedures remain effective in highlighting high risk areas,
  which are then targeted for improvement. For example, during the year ended
  31 March 2005, progress was made on a number of initiatives, including road
  risk, health and well being, stress management and behavioural safety programmes.
  In addition, in response to the threat of terrorist activity the group has reviewed
  the security of its assets and steps have been taken to upgrade the existing
  security protection measures in line with national guidance. The involvement
  of all staff in these initiatives is a prerequisite and the group has continued
  to work in partnership with a range of


|   |                                                     
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|12 | United
      Utilities Annual Report & Accounts 2005

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trade unions and employee
  representatives operating across the businesses. These processes will continue
  and 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 they can continue to work
  in a position appropriate to their experience and abilities. PROPERTYAs at 31 March
  2005, 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: 
    40,064
      kilometres of sewers;
    1,739
      pumping stations;
    371
      storage tanks;
    3,202
      combined sewer overflows;
    589
      wastewater treatment works; and
    39
      sludge treatment facilities. United Utilities
  Waters water operations involve owning and managing assets which include: 
    192
      raw water impounding reservoirs;
    865
      kilometres of raw water large diameter trunk mains;
    117
      water treatment works;
    1,144
      kilometres of treated water large diameter trunk mains;
    455
      service reservoirs and water towers storing treated water;
    648
      pumping stations; and
    39,597
      kilometres of trunk and distribution mains. As at 31 March 2005,
  United Utilities Electricitys facilities included 13,655 kilometres of
  overhead lines, 45,329 kilometres of underground cables (operating at 132 kilovolts,
  33 kilovolts, 25 kilovolts, 11 kilovolts, 6.6 kilovolts and 400/230 volts),
  15,638 ground mounted sub-stations and 16,664 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. As at 31 March 2005,
  Your Communications facilities included approximately 4,160 kilometres
  of underground fibre. Where the fibre is otherwise than in the public highway,
  Your Communications holds wayleaves which entitle it to run this fibre through
  and across private land and in some circumstances these can be terminated by
  the landowner or occupier upon notice. However, Your Communications has statutory
  rights under the Communications Act 2003 to seek the compulsory retention of
  a wayleave if termination is sought by the landowner/occupier. The exception
  to this is land owned by Crown Estates. Your Communications does not anticipate
  that any relocation of these facilities will be required. Any such relocation
  of any individual facilities would not have a material adverse effect on the
  business and financial position of Your Communications. Your Communications
         also maintains 142 points of presence (including 41 microwave radio
        sites and
  eight switches) located in England and Scotland, from where services can be
         sold or where network equipment is housed. These points of presence
        are situated
  on properties either owned or leased by United Utilities or leased by Your
        Communications.  Your Communications 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 on the business
        and financial
  condition of Your Communications. In addition, Your Communications leases offices
         in Birmingham, Sheffield, Bolton, Manchester and London. The headquarters
        and
  depot in Manchester are leased from United Utilities Electricity. At 31 March 2005,
  Vertexs facilities included leased customer management centres at: Knowsley,
  Warrington, Whitehaven, Bedford, Rayleigh, Edinburgh, Nairn, Forres, Dingwall,
  London, Birmingham, Speke and New Delhi, India. Properties in Bolton and Manchester
  are leased from the groups infrastructure management business. Following
  the purchase of First Revenue Assurance, it


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, Cheshire                | 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                         | Sludge processing
      centre    | 12                     |    
|Watchgate, Cumbria                                | Water treatment
      works       | 12                     |    
|Sandon Dock,
      Liverpool                      | Wastewater treatment
      works  | 8                      |    
|                                                  |                                   |                        |    
|(1)   One hectare
             equals 2.47 acres. |                                   |                        |    



|United Utilities
      Annual Report & Accounts 2005 | 13
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Operating and financial reviewBusiness
description continued also operates a debt collection centre based in Denver, Colorado. Its headquarters in Manchester are also leased. 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 and 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 headquarters
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 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.
The company is not aware of any material environmental issues which would prevent
the companys 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.








|14 | United Utilities Annual Report & Accounts 2005
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Operating and financial review
Operating and financial performance review

In this discussion, references to segmental operating profit/loss are defined as total operating profit before goodwill amortisation and exceptional items for a segment as shown in note 2 of the
consolidated financial statements on page 63. NON-GAAP MEASURESThe group gives
certain additional information in order to provide readers with an increased
insight into the underlying
performance of the business, in line with managements own view. The
measures are either required or permitted under UK GAAP, but are considered non-GAAP
measures for the purposes of US GAAP. An explanation of these presentations is
given below. Total operating profit before goodwill amortisation and exceptional items and profit before tax before goodwill amortisation and exceptional itemsTotal operating profit before goodwill amortisation and exceptional items is directly derived from the consolidated profit and loss account of the consolidated financial statements. Management
believes this financial measure provides useful information to investors as it represents the total of the operating profits/losses for each segment, which is the measure that management uses to evaluate segmental 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. Management uses total segmental
operating profits/losses to evaluate the trading performance of each segment, because management believes that the exclusion of goodwill amortisation (a non-cash item) and exceptional items (which, by virtue of their size or incidence, have been
disclosed separately and may vary significantly each year) provides a more accurate comparison of annual segmental results, which in turn allows a better understanding of actual segmental trading performance. In assessing the financial position
and results of operations, management believes that providing additional measures
under UK GAAP, which remove the positive and/or negative impact of exceptional
items and the non-cash impact of goodwill amortisation, 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.
The inclusions of total operating profit and total operating profit before goodwill
amortisation and exceptional items and profit before tax and profit before tax
before goodwill amortisation and exceptional items (as reconciled in tables 4
and 5)
allows a complete analysis of both the core trading performance as well as the
impact of these exceptional and non-cash items. Items that meet the definition of
exceptional items under UK GAAP Financial Reporting Standard (FRS) 3, Reporting Financial Performance are
either required or expressly permitted to
be




disclosed as exceptional
        items within the income or expense heading to which they relate. In addition,
        the profit and loss account column approach, which separates goodwill
      amortisation and exceptional items from other costs, is permitted under
  UK GAAP. Exceptional
          items are discussed in the section entitled Exceptional items on
    page 17. Although management uses these financial measures and the segmental analysis as shown in note 2 of the consolidated financial statements to analyse trading performance, total operating profit which
is reconciled to total operating profit before goodwill amortisation and exceptional items in table 4 and profit before tax, which is reconciled to profit before tax before goodwill amortisation and exceptional items in table 5, should also be
considered. Net debtNet debt is
a UK GAAP measure that is required to be disclosed in accordance with Financial
Reporting Standard 1, Cash flow statements (revised 1996). Net debt
is defined as borrowings  (comprising debt, together with derivatives and obligations
under finance leases) less cash and liquid resources. Management uses net debt,
which is reconciled to gross debt in note 23 of the consolidated financial statements,
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. Where these non-GAAP
  measures are included elsewhere in the annual report and Form 20-F (as indicated
  by the symbol *), the definitions included here should be referred to. GROUP RESULTS
OverviewThe results
for the year demonstrate
the continuing success of the groups strategy, in particular reflecting
the growth of the non-regulated businesses. During the year, the regulated business
received its final price determinations, setting prices for the water and electricity
businesses for the next five years, both of which were accepted by the group
in December 2004. Following the conclusion of the regulatory reviews, the board
has set a target of maintaining dividends in real terms over the next five years.
This target is dependent upon the groups regulated business at least
meeting its cost savings targets and the non-regulated businesses continuing
to
perform at least in line with current levels. In addition to the £2.9 billion
capital investment programme that was set out in its final determination, United
Utilities Water is expecting to spend approximately another £200
million as a result of carry over of obligations funded during the previous regulatory
period.


|                                                                          |       |   |       |   |       |   |       |  |        |  
|------------------------------------------------------------------------- | ----- | - | ----- | - | ----- | - | ----- |  | ------ | -
|Table 4:                                                                  |       |   |       |   |       |   |       |  |        |  
|                                                                          | 2005  |   | 2004  |   | 2003  |   | 2002  |  | 2001   |  
|For the year ended 31 March                                               | £m    |   | £m    |   | £m    |   | £m    |  | £m     |  
|                                                                          |       |   |       |   |       |   |       |  |        |  
|Total operating profit                                                    | 645.9 |   | 583.7 |   | 524.9 |   | 533.4 |  | 506.8  |  
|Goodwill amortisation                                                     | 16.2  |   | 8.8   |   | 7.5   |   | 8.0   |  | 4.0    |  
|Exceptional items                                                         | 29.7  |   | 4.6   |   | 29.3  |   | 11.9  |  | 16.6   |  
|Discontinued operations                                                   |      |   |      |   |      |   |      |  | (21.6  | )
|                                                                          |       |   |       |   |       |   |       |  |        |  
|Total operating profit before goodwill amortisation and exceptional items | 691.8 |   | 597.1 |   | 561.7 |   | 553.3 |  | 505.8  |  
|                                                                          |       |   |       |   |       |   |       |  |        |  
|                                                                          |       |   |       |   |       |   |       |  |        |  
|Table 5:                                                                  |       |   |       |   |       |   |       |  |        |  
|                                                                          | 2005  |   | 2004  |   | 2003  |   | 2002  |  | 2001   |  
|For the year ended 31 March                                               | £m    |   | £m    |   | £m    |   | £m    |  | £m     |  
|                                                                          |       |   |       |   |       |   |       |  |        |  
|Profit before tax                                                         | 370.4 |   | 337.5 |   | 327.5 |   | 302.8 |  | 477.7  |  
|Goodwill amortisation                                                     | 16.2  |   | 8.8   |   | 7.5   |   | 8.0   |  | 4.0    |  
|Exceptional items: -
         operating                                   | 29.7  |   | 4.6   |   | 29.3  |   | 11.9  |  | 16.6   |  
|- non-operating                                                           | (8.6  | ) | (1.9  | ) | (34.0 | ) |      |  | (191.2 | )
|Discontinued operations                                                   |      |   |      |   |      |   |      |  | (17.6  | )
|                                                                          |       |   |       |   |       |   |       |  |        |  
|Profit before tax before goodwill amortisation and exceptional items      | 407.7 |   | 349.0 |   | 330.3 |   | 322.7 |  | 289.5  |  
|                                                                          |       |   |       |   |       |   |       |  |        |  



|United Utilities Annual Report & Accounts 2005 | 15
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Operating and financial reviewOperating and financial performance review continued

Furthermore, the group estimates
  that there is potential for up to approximately £500 million of additional investment relating to projects that were not part of the groups regulatory
  contract for 2005-10. Including United Utilities Electricitys £640 million investment programme, the regulated businesses could be required to spend over £4
  billion on capital investment over the next five years. To the extent that this additional
  expenditure, of up to approximately £500 million, represents new obligations on United Utilities Water, it will meet the criterion for a relevant change
  of circumstance, which means that it may be eligible for inclusion in any Interim Determination of K (IDoK) application that United Utilities Water might make during the AMP4 (2005-10) period. If an IDoK application is made and is
  successful, Ofwat would adjust United Utilities Waters price limits during
  the AMP4 period to provide additional revenues in respect of this capital expenditure
  and any other items that are required to be taken into account in the IDoK.
  If United Utilities Water chose not to make an IDoK application during AMP4,
  either because the expenditure was not sufficiently material or it was offset
  by reduced costs in other areas, then United Utilities Water expects that this
  expenditure, to
  the extent that it represents additional obligations, would be logged-up at
  the 2009 periodic review. The additional expenditure would then be reflected
  in prices over the 2010-15 period and beyond. To assist in funding future investment
  in the regulated water and electricity businesses, the group will be undertaking
  the second stage of the rights issue in June 2005 to raise up to approximately £1 billion (net of expenses) from its shareholders across both tranches. The first tranche, received during September 2003, raised around £501 million (net of costs) from the issuing of 309,286,997 A shares. The second tranche of
  proceeds will reflect the subscription for further A shares. Following the second subscription, all A shares will be consolidated on a two for one basis and reclassified as £1
  ordinary shares. The second stage of the rights issue will make an important
  contribution to the funding of the regulated capital investment programmes
  over the 2005-10 period. In licensed multi-utility operations,
  segmental operating profit has increased by 13.1 per cent, primarily reflecting
  the increase in turnover, driven by an 8.9 per cent real increase in water
  prices  in line with the regulatory determinations. Segmental operating profit
  increased by 3.3 per cent in 2003/04 reflecting the increase in turnover, primarily
  offset by a number of factors, principally higher operating costs and depreciation. Infrastructure management turnover
  has increased by 21.5 per cent due largely to increased activity on the British
  Gas Trading contract and the first full-year contribution from the Scottish
  Water contract. This compares with an increase in turnover of 12.5 per cent
  in 2003/04 due to the first full-year impact of the British Gas Trading Contract
  and the initial impact of the Scottish Water contract.Segmental
  operating profits have also
    increased by 34.7 per cent in the last two years. During the year, two major
    outsourcing contracts with Welsh Water and Southern Water, with a combined
    total contract value of around £1.8 billion to United Utilities, were
    secured. Both  contracts were successfully mobilised in April. Having recently
    signed an eight-year, £1.1
    billion, contract to operate the north of England gas distribution network,
    the contract successfully commenced on 1 June 2005. Turnover in business process outsourcing
  has increased by 7.6 per cent primarily due to the increase in volumes on public
  sector contracts, notably the second phase of the Department for Work and
  Pensions contract, and the first full-year contribution of the North American
  debt collection activity. In 2003/04, the increase in turnover of 19.8 per
  cent was primarily due to the first-full year impact of the contracts with
  the Department for
  Work and Pensions and Westminster City Council. Segmental operating margins
  of 6.7 per cent compare with 6.8 per cent in 2003/04 and 6.1 per cent in 2002/03.
  Margin growth was held back by the higher than normal level of bid costs in
  2004/05  compared with 2003/04. The




segmental operating margin improvement in 2003/04 was achieved mainly due to the increased maturity of the external contract portfolio. During May 2005, the business completed the acquisition of
  Marlborough Stirling plc, which will provide Vertex with an entry point into the financial services sector. During the year, the infrastructure
  management and business process outsourcing businesses began working in partnership
  to secure contracts with local authorities such as Thurrock Unitary Council,
  for which contract activities commenced on 1 April 2005, and Walsall Council,
  for which the group has been named as preferred supplier, working as a subcontractor
  to Fujitsu Services. Growth in Your Communications turnover
        has continued, increasing by 25.9 per cent in 2004/05 and 14.8 per cent
        in 2003/04. Segmental operating
    losses have also reduced by 69.3 per cent in 2004/05 and 14.9 per cent in
        2003/04, reflecting increased turnover, control of operating costs and
        the successful
    integration
    of the Eurocall acquisition, announced in March 2004. During the year, the
    business completed the first three phases of its contract with the Northwest
    Development Agency to provide broadband access to Cumbria ahead of schedule. Financial performanceGroup turnover
(including share of joint ventures) increased by 11.9 per cent to £2,368.2
million in 2004/05 compared with an increase of 10.2 per cent in 2003/04 and
2.6 per cent
  in 2002/03. These movements reflect the impact of the allowed regulatory revenues,
  combined with continued growth in infrastructure management, business process
  outsourcing and telecommunications. Total operating profit increased
  by 10.7 per cent in 2004/05 to £645.9 million. Total operating profit before goodwill amortisation and exceptional items* increased by 15.9 per cent in 2004/05
  to £691.8 million, principally reflecting improved segmental operating
  profits in licensed multi-utility operations driven by an 8.9 per cent real
  increase in water prices and infrastructure management, reflecting the increasing
  maturity of contracts. Telecommunications segmental operating losses have continued
  to reduce as revenues and gross profits increase and the synergy benefits from
  the Eurocall acquisition have been realised. Total operating profit before
  goodwill amortisation
  and exceptional items* increased by 6.3 per cent in 2003/04, mainly due to
  improved segmental operating profits in infrastructure management and business
  process outsourcing, together with a marginal increase in the licensed businesses
  where the increase in turnover was largely offset by a number of factors, principally
  higher operating costs and depreciation on the expanded asset base. The net interest expense for the
  year was £284.1 million, compared with £248.1 million in 2003/04 and £231.4 million in 2002/03. The increase in both 2004/05 and 2003/04 primarily
  reflects the higher level of borrowings to fund the groups capital expenditure
  programmes. Profit before tax in 2004/05 increased
  by 9.7 per cent to £370.4 million. This is stated after net exceptional charges of £21.1
  million (discussed below). The increase in profit before tax is driven by improved
  segmental operating profits in licensed multi-utility operations, infrastructure
  management and business process outsourcing and reduced segmental operating
  losses in telecommunications. Profit before tax increased by 3.1
  per cent to £337.5 million in 2003/04. The increase was due to improved results for all segments. Profit before tax in 2003/04 included an exceptional charge
  of £2.7 million (discussed below). Basic earnings per share decreased by 14.1 per cent to 46.8 pence in 2004/05, largely as a result of the increase in the deferred tax charge. In 2003/04 basic earnings per share increased by 19.0 per
  cent to 54.5 pence, due to increased segmental operating profits. Earnings per share has been restated for all periods prior to the first stage of the rights issue to reflect the bonus element of the rights issue in accordance with FRS
  14. Goodwill amortisation was £16.2 million in 2004/05, £8.8 million in 2003/04 and £7.5
  million in 2002/03. Goodwill amortisation in


|   |                                                   
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|16 | United
    Utilities Annual Report & Accounts 2005

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2004/05 consisted of £9.9 million relating to telecommunications (2003/04: £4.0 million, 2002/03: £3.4 million), £5.4 million relating to business process outsourcing
    (2003/04: £3.8 million, 2002/03: £2.8 million) and £0.9 million relating to infrastructure management (2003/04: £1.0 million, 2002/03: £1.3
    million). The increase in 2004/05 principally reflects the goodwill arising
    from the acquisition of Eurocall by Your Communications, which was announced
    in March 2004. The increase in 2003/04 reflected the goodwill arising from
    the acquisition of 7C by Vertex in December 2002. The dividend per ordinary share
  for the year is 45.42 pence, an increase of 2.5 per cent compared with the
  dividend per ordinary share in 2003/04 of 44.31 pence. The valuation of the groups
  pensions schemes under FRS 17 results in a net pension deficit at 31 March
  2005 of £55.7 million compared with a net deficit of £264.4 million
  at 31  March 2004 and £298.1 million at 31 March 2003. 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. Exceptional itemsUnder UK GAAP, exceptional items are material items that derive from events or transactions that fall within the ordinary activities of a reporting entity and which, individually, or, if of a similar
    type in aggregate, are required or expressly permitted to be disclosed by virtue of their size or incidence if the financial statements are to give a true and fair view. Exceptional items, which are disclosed
    separately under UK GAAP in accordance with FRS 3 Reporting Financial Performance,
    are as follows: Table 6:2005
   
   2004
   
   2003For the year ended 31 March
   £m
   
   £m
   
   £mOperating exceptional items:Business restructuring
   (29.7
   )
   (4.6
   )
   (3.8
   )FRS 11 adjustment to carryingvalue of telecoms assets
   
   
   
   
   (25.5
   )Non-operating exceptional items:Profit on sale or termination of operations
   4.5
   
   4.3
   
   34.0Profit/(loss) on disposal of fixed assets
   4.1
   
   (2.4)
   
   (21.1
   )
   (2.7
   )
   4.7 Business restructuring costs in 2004/05
of £29.7 million mainly relate to the restructuring programmes in licensed
multi-utility operations in preparation for meeting its 2005-10 efficiency  challenges,
in infrastructure management relating to the restructuring of the business units
into market facing business streams, focusing on their specific risks, and in
business process outsourcing, a restructuring to form a divisionalised
structure which better reflects the markets in which the business operates. Business
restructuring costs in 2003/04 of £4.6 million related to costs arising
for the integration of the Eurocall business acquired by Your Communications.
In 2002/03,
severance costs of £3.8 million related to telecommunications. Business
restructuring costs are considered to be exceptional items under UK GAAP as they
are significant programmes for the businesses concerned. FRS 3 therefore expressly
permits  disclosure of these costs as exceptional items within the income or
expense heading to which they relate. Under UK GAAP, the
        group performed an impairment review within its telecommunications business
        in accordance with FRS 11 in the
  year ended 31
  March 2003. This resulted in an adjustment to value of £25.5 million, which
  was considered to be an exceptional item by virtue of its size and nature. FRS
  3 therefore expressly permits disclosure of this adjustment as an exceptional
  item
  within the income or expense heading to which it relates.




The profit on sale or termination
of operations relates to the groups withdrawal from various infrastructure
management businesses. In the year ended 31 March 2003, the group concluded it
no  longer had a participating interest in IEBA, the Argentine utility for which
United Utilities had been technical operator, and in which the group had a minority
interest. It therefore ceased to account for the investment as a joint venture.
The
accounting provision that existed at 31 March 2002 in respect of the investment
in Argentina was taken to the profit and loss account in 2003 which, along with
the disposal of US Water and costs associated with withdrawing from infrastructure

management in the Americas, gave rise to an exceptional credit of £34.0
million. In 2004 and 2005, further credits were recognised relating to the withdrawal
from infrastructure management in the Americas. In 2005, the group disposed of
its Green Energy business and reduced its shareholding in Manila Water Company
through an initial public offering. FRS 3 requires that profits or losses on
the sale or termination of an operation be shown separately on the face of the
profit and loss
account after operating profit and before interest. The profit and loss on disposal of fixed assets in the years ended 31 March 2005 and 2004, respectively, relate to the disposal of fixed asset investments. FRS 3 requires that profits or losses on
the disposal of fixed assets be shown separately on the face of the profit and loss account after operating profit and before interest. TaxationThe current UK mainstream corporation tax credits in 2004/05, 2003/04 and 2002/03 reflect the high level of accelerated tax allowances arising from the capital investment undertaken by the group and
the benefits of Advance Corporation Tax (ACT) planning established in earlier years. A tax credit has arisen in the current year following the agreement of prior year tax returns. The effective current ordinary tax
credit (excluding exceptional items) is 8.1 per cent, compared with a credit
of 6.1 per cent in 2003/04 and 9.0 per cent in 2002/03. Including deferred tax,
there is an effective ordinary tax charge (excluding exceptional items) of 11.1
per cent, compared with a credit of 7.1 per cent and a charge of 17.6 per cent
in 2003/04 and 2002/03, respectively. An exceptional deferred tax credit in 2004/05
of £8.1 million is primarily due to restructuring costs incurred by the group. An exceptional deferred tax credit in 2003/04 of £0.8 million mainly arose from the integration costs of the Eurocall business. An exceptional credit of
£9.4 million (including £3.1 million deferred tax) was recorded in
2002/03 primarily due to the adjustment to value in the telecommunications business. Deferred tax (excluding exceptional
deferred tax) is a £75.3 million charge in 2004/05, compared with a £3.4
million credit and a charge of £85.9
million in 2003/04 and 2002/03, respectively. The charge in 2004/05 arises as
there has been no significant movement in UK government bond rates during the
year and reflects the movement in the discounted deferred tax liability. The
credit in 2003/04, was principally due to the
effect of increased UK government bond rates on the discount of the deferred
tax liability, whereas the increased charge in 2002/03 reflected the effects
of reduced discount rates. CashflowsNet cash inflow
from operating activities
decreased to £724.9 million, from £923.5 million in 2003/04 and £851.5
million in 2002/03. The decrease in 2004/05 reflects the lump sum  pension contribution
of £320 million offset by increased operating profits discussed above.
Similarly, the increase in 2003/04 was principally as a result of increased turnover
and operating
profits. Returns on investment
        and servicing of finance includes £19.7 million
  of cash received in 2004/05 due to the early termination of certain interest
  rate swap contracts. £83.0
  million was received in 2003/04 through a similar exercise. This reduced credit
  exposures to swap counterparties. The resultant gains are being deferred in the
  balance sheet and will be released to the profit and loss


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Operating and financial reviewOperating and financial performance review continued

account over the period of the initial hedge. Tax payments remain low reflecting the benefits of previous tax planning and the current tax charge discussed earlier. A significant level of capital
    investment continues to be made, mainly as a result of the water and wastewater
    capital
    investment programme. The 2004/05 capital investment of £883.8 million
    represents a 13.2 per cent decrease over 2003/04 reflecting the phasing of
    the AMP3 capital programme. Cash receipts in 2004/05 include
    the proceeds from the initial public offering of part of the groups investment in Manila Water Company and the disposal of the Green Energy business. Cash
    payments in 2004/05 include the acquisition of Capgeminis 14.6 per cent equity stake in Vertex for £47.7 million (including costs). Cash payments in respect of acquisitions in 2003/04 included the Eurocall acquisition by Your
    Communications, the acquisitions of Park Environmental Services and a waste management facility from Associated Octel by United Utilities Contract Solutions and the acquisition of First Revenue Assurance in Denver by Vertex. Cash receipts in 2002/03
    included the proceeds from the disposal of the groups investment in
    US Water, offset by the investment in 7C. £20.0 million was received from the issue of shares during the year reflecting the exercise of share options. This compared with £504.1
    million received in 2003/04 mainly as a result of the first tranche of the
    rights issue as described on page 16. Dividend payments in 2004/05 represent
    an increase in line with the groups dividend policy. As a result of the above, net
    debt* increased by £702.7 million to £4,141.1 million at 31 March 2005. Gearing, measured as net debt* divided by total capital employed (being equity
    shareholders funds plus net debt*), increased to 57 per cent, compared
    with 53 per cent at 31 March 2004 and 57 per cent at 31 March 2003. The group
    seeks to ensure that sufficient funding is available to meet foreseeable
    requirements plus headroom for contingencies. UNITED UTILITIES NORTH WEST
  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. United Utilities North West was
    formed during 2004/05 from the merger of the Customer Sales (which managed
    customer contact, billing and collections) and Service Delivery (which managed
    the regulated assets) business streams. 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. Financial highlightsTurnover increased
by 6.5 per cent to £1,384.7 million in 2004/05, largely due to a real increase
    of 8.9 per cent in water and wastewater prices offset by 3.0 per cent real
    reduction
    in electricity revenues. This compared with growth of 5.7 per cent in 2003/04,
    when water and wastewater prices increased by 4.0 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 13.1 per cent to £587.9 million in 2004/05, primarily reflecting
    the increase in turnover. Segmental operating profit increased by 3.3 per
    cent
    in 2003/04




reflecting the increase in turnover,
    primarily offset by a number of factors, principally higher operating costs
  and depreciation. Capital investment
        for the year was £858.7 million
      (2003/04:
£1,013.9 million). £706.9 million (2003/04: £864.2 million)
  was spent on water and wastewater and £151.8 million (2003/04: £149.7
  million) on electricity distribution. The capital investment programmes for water
  and  wastewater are progressing in line with the regulatory output schedule.
  In electricity, a programme of asset replacement and load investment has allowed
  the company to further enhance the resilience of the electricity network. This
  performance has
      been demonstrated by the improvement in Ofgems regulatory measures
      of total customer minutes lost and total number of customer interruptions
      to supplies. Business performanceWater quality
performance improved to 99.74 per cent on the Drinking Water Inspectorates
water quality index, up from 99.72 per cent the previous year. United Utilities
maintained
    water
    supplies to all customers during 2004/05 without the need for any water use
    restrictions. Enhancements to the water supply system have been undertaken
    to ensure that all parts of the region have adequate water supplies available
    in dry
    weather. It is important for the business
    to take into consideration the impact of its activities on all stakeholders
    and on the environment. In 2004/05, the score in respect of non-compliant
    works (measured per head of population served) was 0.002 per cent, an improvement
    on the level achieved in 2003/04 of 0.26 per cent. This was achieved by putting
    problem works into an intensive care programme, increasing maintenance
    spend, operator involvement and capital work. In 2004/05, as part of the
    capital investment programme, 76 continuous discharge and 145 UID improvement
    projects
    were delivered. Furthermore, service levels continued to improve the Overall Performance Assessment (OPA) score, as measured by Ofwat, to 399 points in 2004/05 from 394 in 2003/04. The continued objective is to
    sustain the level of operational performance and reduce the cost of short-term remedial work required. In the year ended 31 March 2005,
    the business was prosecuted on nine separate occasions relating to pollution
    incidents and consent breaches (eight in 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. A
    series of health and safety initiatives has been implemented to reduce risks,
  which helped reduce the days lost due to accidents from 985 to 851. Working
      in partnership with contractors, the business is successfully delivering
      Ofwats
      regulatory output schedule. The policy to standardise designs and equipment,
      wherever possible, is helping to make sure money is invested wisely and,
      at the same time, reduce the whole-life costs of new plant and equipment. In December 2003, Ofwat published
    its final decision on the Interim Determination of K (IDoK) application,
    which allowed an increase in real prices by a further 4.4 per cent in 2004/05.
     This was in addition to the allowed 4.5 per cent real price rise, which
    was set at the last price review and brought the total allowed real price
    increase for 2004/05 to 8.9 per cent. The increase reflects certain additional
    costs the business had
    experienced since 2000 that were not initially allowed in the five-year regulatory
    period 2000-05, including higher construction costs and extra costs and loss
    of revenue following the ban on disconnection of households for non-payment
  of bills. When Ofwat adjusted
        price limits in December 2003 as a result of United Utilities IDoK,
      expenditure relating to a number of schemes in the sewer overflow programme
      (also known as UIDs), which had been identified as being poor value for money,
      was eliminated from 2004/05 prices. In the review of price limits completed
      in 2004, United


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Utilities submitted a claim (which was agreed by the regulator) for work it had carried out or planned to carry out before the end of the regulatory period 2000-05 in relation to UIDs. In its final
determination in December 2004, Ofwat included completed or proposed work it considered to be cost-effective within 2005-10 prices. If other work is required in these
catchments during 2005-10, then United Utilities will seek the recovery of costs
according to the procedures set out in Ofwats protocol for dealing with
changed requirements between price limits or through the next price review. Throughout
  the year, real improvements in managing cash and the problems associated with
  long-standing customer debt have continued to be delivered. Regulatory targets
  on
  all customer service measures have been met or exceeded. The number of telephone
  calls answered within 30 seconds was 94.5 per cent, against a regulatory target
  of 86 per cent and a 2003/04 industry average of 93.5 per cent. United Utilities Water has migrated
the vast majority of its customers onto a new billing system, and this has been
used to calculate and send customers bills for 2005/06. The new system is
targeted to deliver cost savings for the business in 2005/06 as well as providing significant service improvements for customers. In electricity distribution,
        both regulatory targets and the companys
  own internal targets for providing continuous supplies to customers were out-performed.
  Customer interruptions and minutes lost per connected customer were reduced.
  Through good contingency planning and a rapid response, service teams were
        able to minimise the impact on customers of
  damage to the distribution network caused by winter storms, notably the major
  incident affecting Cumbria and Lancashire in north west England, in which a
        storm severely damaged the electricity network supply to 250,000 customers. Business impactsTo ensure that higher levels of performance continue to be achieved following the acceptance of the final determinations in December 2004, new initiatives are being designed to improve efficiency and
reduce cost. Key to this aim, the business restructuring programme is designed to streamline operations, achieve cost savings and enable customer service to be led from one part of the business. Procedures are now largely in place for the management
of the next five-year capital investment programmes in water, wastewater and electricity distribution. This will ensure that the appropriate business processes, organisation, systems and commercial contracts are in place to provide maximum
shareholder value from the asset base. During May 2005, the company appointed
partners to help deliver its £2.9 billion water and wastewater programme
during the AMP4 (2005-10) regulatory period. This covers the majority of the
water quality and environmental improvements that will be carried out on its
treatment works and major sewer overflows over the next five years. The delivery of United Utilities previous
investment programme has confirmed the success of its framework contractor approach,
which was put in place during AMP3. The delivery strategy for AMP4 builds on
this success with the group taking a leading role in programme management, increasing
its internal resources in engineering and design and placing a greater emphasis
on performance management through the alignment of financial targets with
partners and benchmarking outturn results. A key enabler is the creation of integrated
work teams with responsibility for delivering projects from conception through
to commissioning. These changes will help the group deliver the capital efficiencies
required by Ofwat. For the first time, the execution
of the groups electricity distribution investment programme is being more closely aligned with the delivery of its water and wastewater network programmes. The
appointed partners, who will help carry out work on the groups network
of sewers, pipes and cables during the 2005-10 period, are Balfour Beatty and
Morgan Est. This approach should enable the group to target significant cost
savings through
the use of




common systems, improved scheduling and more integrated supply chain management. Contractors will also be better incentivised to make cost savings, without compromising on quality, by aligning the
sharing of efficiencies. Operational strategy is being realigned to deliver further efficiencies in operations and maintenance. Areas that will yield benefits include automation and the remote monitoring of plant,
streamlining of processes and the development of high performance teams. Reductions in overheads and accommodation costs and supply chain management should maximise value from the scale of the business and deliver benefit from long-term partnerships
with key suppliers. Having made preparations
        in advance of receiving the final regulatory determinations, which the
        group accepted in December 2004, the group has plans in place which
        it believes will enable it to meet the efficiency challenges over the
        2005-10 period. In its final determination, Ofwat granted United Utilities
        Water an average annual real price increase of 4.5 per cent over the
        next five years. The price profile is front-end loaded, with the highest
        increases in the first
  two years of the review period. In its final proposals, Ofgem allowed United
        Utilities Electricity a real price increase of 8.2 per cent in 2005/06,
        followed by constant real prices thereafter. The price rises allowed in the recent water price review caused concern for United Utilities North West and its customers about the affordability of water bills, particularly for vulnerable
customers. Processes are in place to manage debt in a way that is fair to customers and effective for the business. Furthermore, a range of initiatives are available that provide support, such as the vulnerable customer tariff, an arrears allowance
scheme and money advice services. In 2005, an independent charitable
trust was created, to which the group intends to donate £15 million over
the next five years. The trust will help water customers facing financial difficulty
by clearing outstanding water arrears and other, non-water, bills. During the year, the business has
issued communications to help ensure that all customers understand the reasons
for increased water bills, through, for example, the use of regional media to
carry local articles about the customer benefits of the investment programme,
raising awareness of the water and wastewater services supplied and through business
customer seminars. Information on the groups investment plans and the price review
process are also available through the groups web site, leaflets and customers bills. United Utilities North West has taken
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 benefits from which deductions can be made and to improve
the take-up of such schemes. UNITED UTILITIES CONTRACT SOLUTIONSBusiness
objectivesUnited Utilities
Contract Solutions
applies the groups core infrastructure management skills to growth markets in the UK and overseas by seeking to develop secure long-term income streams,
while managing the resultant changes to the groups risk profile. Utility Solutions
        is responsible for the groups utility outsourcing contracts in the UK. The approach adopted by Scottish Water and Southern Water for the delivery of their
  capital investment programmes shows the continuing trend for larger outsourcing opportunities. The portfolio of existing contracts, and the market-focused offering of the Utility Solutions business,
  means it is well placed to take advantage of
  similar future opportunities. The multi-utility expertise within Industrial and Commercial Solutions presents real growth opportunities within the UK domestic, industrial and commercial markets as companies continue to seek new
ways to deliver cost-effective services. The International division applies
the groups expertise in


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Operating and financial reviewOperating and financial performance review continued

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 highlightsTurnover increased
  by 21.5 per cent
  to £543.1 million in 2004/05, largely due to increased activity on the
  British Gas Trading contract and the first full-year impact of the Scottish
  Water contract. This compares with an increase in turnover of 12.5 per cent
  in 2003/04
  due to the first full-year impact of the British Gas Trading Contract and the
  initial impact of the Scottish Water contract. Segmental operating profit increased
by 16.8 per cent to £79.2 million in 2004/05, reflecting the increasing
maturity of contracts, the first full-year impact of the Scottish Water contract,
increased shareholdings in European concession and increased activity on the
British Gas Trading contract. Segmental operating profit in 2003/04 increased
by 15.3 per cent to £67.8
million reflecting the increase in contract activity, including the initial impact
of the Scottish Water contract and increased shareholdings in European concessions. Business performanceUtility SolutionsDuring the year,
two major outsourcing contracts with Welsh Water and Southern Water were signed,
which have a combined
total contract value of £1.8 billion to United Utilities. Both contracts
were successfully mobilised in April 2005. The original Welsh Water contract,
signed in 2001, was scheduled to expire 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 Overall Performance Assessment tables
to second position. The contract with Southern Water is
being managed by a consortium consisting of United Utilities and Costain, which
each have shares of 40 per cent, and Mongomery 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, West and East Sussex,
Kent and the Isle of Wight. The first full-year of the Scottish
Water Solutions contract has also been successful. In partnership, Utility Solutions
is helping Scottish Water deliver approximately £1.1 billion of its
capital investment programme. During the year, the investment target of £426
million, including efficiencies, was achieved. The joint venture company won
three awards at the annual Utility Industry Achievement Awards ceremony, reflecting
excellent business practices. United Utilities eight-year
contract to operate the north of England gas distribution network commenced on
1
June 2005, with around 1,100 employees transferring from National Grid Transco
to
United Utilities. The contract is worth around £1.1 billion and covers
the management of around 36,000 km of gas mains, serving a population of more
than six million. The north of England distribution network extends from the
Scottish
border
to South Yorkshire and across to Carlisle and Cumbria. InternationalIn Manila, the joint venture company successfully listed on the Philippine Stock Exchange during March 2005. The International business placed part of its overall shareholding in the business,
reducing its interest to 11.7 per cent. The International business also retains the secure revenue stream as the designated international operator. In Australia, work is ongoing on the
construction of a £7 million




advanced wastewater treatment plant and network at Victor Harbor for the South Australian Water Corporation and state government. Once construction is completed, the Australia business has a 20-year
contract to operate and maintain the assets. Industrial and Commercial SolutionsActivity levels for the metering services contract with British Gas Trading continue to be on target. The requirements of the contract are now fully embedded in the operations of the business. A
  15-year contract was signed during the year to provide facilities and property
        management, highways engineering and transportation services to Thurrock
        Unitary Council, working alongside Vertex. The business has also been named as
preferred bidder in partnership with Fujitsu and Vertex to provide a similar
range of services to Walsall Council. This contract is expected to commence later
in the year. The contracts with Thurrock Unitary Council and Walsall Council,
combined, are worth around £200 million to United Utilities Contract Solutions. The Industrial business secured a five-year contract to operate and maintain water and wastewater assets for the Atomic Weapons Establishment. 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. Disposal of Green EnergyDuring December
2004, United Utilities
sold its Green Energy operational assets for £63 million in cash to Novera
Macquarie Renewable Energy Limited, a company jointly owned by Novera Energy
and Macquarie Bank of Australia. Business impactsUnited Utilities
Contract Solutions businesses
serve different markets with different influences. The new management structure,
adopted during this financial year, increases focus within the business on the
differing risks which impact on the business streams. A key issue as the business grows is to recruit, retain and develop the right people. A sponsorship scheme for undergraduate students is now into its second year, which involves a job placement
whilst at university. In addition, the business has been recruiting for its apprenticeship programmes in Wales and Scotland. 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. VERTEXBusiness objectivesIn order to
accommodate the growth and broader business base of the company, Vertex has recently
restructured from a functionally based organisation to a divisionalised structure,
which better  reflects the markets in which it operates. The company now operates
through four autonomous lines of business, with the creation of a Public Sector
division, Financial Services division, Utilities and Enterprise division and
North American division.
Vertex believes that the reorganisation has positioned the company for further
growth and will enable greater responsiveness to client requirements within the
target sectors. North AmericaVertexs strategy in North America is: first to optimise delivery on the Hydro One contract in Canada (a ten-year deal worth nearly £140 million); and, second, to pursue large North
American energy and utilities opportunities as the market continues to deregulate, by leveraging off its UK energy and utilities market
deregulation experience. In March 2004, Vertex acquired US based debt collection
agency First Revenue
Assurance (FRA), giving it a route


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to the larger utilities deals by gaining a foothold in the US utilities collections market and supporting its North America utilities strategy.
Finally, through its channel partners, who provide access to key market areas,
Vertex intends to pursue deals that have the potential to utilise its facilities
in India and it is already in discussions with a number of potential clients. Public sectorVertex is successfully
pursuing its strategy of growing its business in both local and central government.
It regards
the Westminster City Council contract as a blueprint for transforming service
delivery in local government and a basis for its future expansion plans. At the
time of contract signature, it was the UKs largest local government outsourcing
deal, worth up to £422 million. In this contract, Vertex developed a fresh

approach  called Citizen First  to deliver local authority
services. This was reapplied to the successful bid for Thurrock Unitary Council.
This contract, secured during the year, is one of the largest transformational

outsourcing deals in the UK, worth £427 million over 15 years. In partnership
with Thurrock Unitary Council, Vertex will manage and re-engineer a number of
their
business processes, ranging from business accounting and financial services to
revenue services, procurement and human resources. The contract is being managed
in partnership with United Utilities Contract Solutions, which is providing facilities
management, highways engineering and transportation services to the council. In the central government market,
Vertex has operated the successful Payments Modernisation Programme for
the Department for Work and Pensions for the last two years and is currently
in
discussions about a number of other central government business process outsourcing
opportunities. Vertex, in partnership with United Utilities Contract Solutions, has also been named as preferred supplier to provide Walsall Council with services to meet its modernising and efficiency agendas,
working as a subcontractor to Fujitsu Services. This is a similar contract in size and scope to the contract with Thurrock Unitary Council, and is expected to commence later in the year. Utility and enterpriseVertex continues to grow organically. It offers clients customer management expertise, coupled with benefits from the economies of scale available across its multi-client sites as it standardises
processes across its operations, reducing the cost base, sharing common infrastructure and improving margins. Underpinning its strategy in both
the utilities and private enterprise sectors, Vertex has continued to grow its
operations in New Delhi, India and has commissioned a second site to support
that growth. Vertex offers clients a total solution, either combining operational
locations in both India and the clients home market or by transferring
client operations offshore. In both models, clients benefit from fast, low-risk
access to the
economic and educational benefits of the Indian marketplace. Financial servicesRecently, Vertex
acquired Marlborough Stirling plc. The acquisition will provide Vertex with
an entry point into the
business process outsourcing segment of the financial services market. The group
believes that Marlborough Stirling has significant untapped potential that can
be unlocked by combining its sector specific knowledge with Vertexs expertise
in business process outsourcing. The merger of the two businesses also provides
 opportunities to secure synergy savings. Vertex has already identified immediate
opportunities to deliver efficiencies of around £6 million per annum on
a full-year basis from the acquisition. These savings will be derived from a
reduction in  central overheads, such as corporate costs, and the alignment and
integration of Marlborough Stirlings systems, processes and facilities
with Vertexs
existing operations. Financial highlightsTurnover
increased by 7.6 per cent
to £396.4 million in 2004/05, predominantly due to the increase in volumes
on public sector contracts and the first full-year impact of the North American
debt




collection activity. In 2003/04, the
increase in turnover of 19.8 per cent to £368.5 million was primarily due
to the first full-year impact of the contracts with the Department for Work and
Pensions and Westminster City Council. Segmental operating profit improved
by 5.2 per cent to £26.4 million, reflecting the increased external contract activity, offset by higher bid costs, principally on the Thurrock and Walsall
contracts, together with other contract opportunities that Vertex is pursuing. In 2003/04, the segmental operating profit increased by 33.5 per cent to £25.1
million, due to the effect of increased activity and improved margins. Vertexs segmental operating
margin (6.7 per cent margin in 2004/05) was comparable with the 6.8 per cent
margin in the previous year and higher than the 6.1 per cent margin in 2002/03.
Margin growth has been held back by the higher than normal level of bid costs
in 2004/05 compared with 2003/04. The segmental operating margin improvement
in 2003/04 was achieved due to the increased maturity of the external contract
portfolio
and cost reductions on intra-group contracts, together with the relatively low
level of contract mobilisation in 2003/04. Business performanceIn the financial
year ended 31 March 2005, Vertex won contracts with a total contract value in
excess of £550 million. Contract wins in 2003/04 and 2002/03 were valued at £219 million and
£593 million respectively. The Thurrock Unitary Council contract announced in November 2004 is Vertexs largest ever deal with a total contract value of £427
million. Vertexs outsourcing contract with Westminster City Council continues to progress well. Since last year, the scope of the contract has been extended to include parking services. This extension
is worth around £45 million over ten years in addition to Vertexs original £422
million contract with Westminster. Vertex has signed a new seven-year contract, with a review point after four years, with Powergen Retail Limited, part of E.ON UK. This amends its current agreement, which began in 2003. The new
longer-term contract will redistribute work on a functional basis to enable both companies to maximise economies of scale. In November 2004, United Utilities
acquired Capgeminis 14.6 per cent equity stake in Vertex for £47.7 million in cash. Following this transaction, United Utilities now owns 100 per cent
of Vertexs share capital and Capgemini no longer has any representation
on the board of Vertex. This acquisition does not alter the strategic alliance
that exists between the two companies. 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. With clear objectives, and an experienced management team, Vertex believes it is on course to continue its growth by increasing the choice of services offered to clients and by helping them transform
the way they do business. YOUR COMMUNICATIONSBusiness objectivesYour
Communications continuing objective is to sustain its progress. Its sector is growing but is fiercely competitive. In March 2004, the business announced the acquisition of Eurocall, and
such consolidation strengthens Your Communications position for the future. Eurocall complemented existing operations
and added significant breadth and depth to the customer base. The acquisition
also delivered synergy benefits from combining the operations of the two organisations
in the region of £9 million annually. The groups
  strategy for Your Communications remains unchanged. The business is continuing
  to be developed
  with a view to its disposal when shareholder value can be maximised.


|                                               |   
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|United Utilities Annual Report & Accounts 2005 | 21

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Operating and financial reviewOperating and financial
  performance review continued

Financial highlightsTurnover increased by 25.9
    per cent in 2004/05 to £233.6 million, compared with an increase of
    14.8 per cent in 2003/04, as a result of the continued progress of the business
    in increasing its proportion of higher value business sales combined with
    the Eurocall acquisition. Segmental operating losses were reduced by 69.3
    per cent to £5.1 million in 2004/05 compared to a reduction of 14.9
    per cent in 2003/04. This was due to increased revenue, control of operating
    costs and the successful integration of Eurocall. Business performanceThe business substantially reduced
    segmental operating losses for the full-year and achieved break-even in the
    second half of the year. This was achieved through close attention to the
    cost base of the business, taking advantage of further efficiencies
    and maintaining the synergy benefits gained as a result of the Eurocall acquisition,
    which provided a significant volume of new business, and is now a fully integrated
    part of Your Communications. In addition, the business has been able to reduce
    its indirect cost base as a result of a programme to reach deeper into the
    operators networks, thus resulting in lower costs. As at 31 March
    2005, the first three phases of Your Communications contract with the
    Northwest Development Agency to provide broadband access to Cumbria had been
    completed, approximately one month ahead of schedule. To date, service is
    available to over 50 per cent of the designated public sector sites. The company billed
    a total of 3.72 billion minutes in 2004/05, compared with 2.94 billion minutes
    in 2003/04. Business impactsThe new unified industry regulator, Ofcom,
    was established with effect from December 2003 and is now undertaking a strategic
    review of the UK telecommunications market as discussed on page 11.




LIQUIDITY AND
    CAPITAL RESOURCESThe groups primary source of liquidity
    is cash generated from its ongoing business operations. As reflected in the
    consolidated cash flow statement on page 58, in the financial year ended 2005
    net cash flow generated from the groups trading operations was £725
    million, compared with £924 million in 2004 and £852 million in
    2003. The water regulator and the electricity regulator set 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 eliminated at 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
    net debt* (which is reconciled to gross debt in note 23 to the consolidated
    financial statements) of £4,141.1 million at 31 March 2005 comprised
    £4,059.0 million of bonds, £654.4 million of loans from EIB, the
    groups largest investor, £81.0 million of long-term leasing and
    £208.0 million of bank loans and other borrowings, offset by £861.3
    million of cash and short-term investments. Shorter-term liquidityShort-term liquidity requirements are
    met from the groups normal operating cash flow. Further liquidity is
    provided by cash and short-term investment 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
    investment balances were £861 million at 31 March 2005, compared with
    £1,031 million at 2004 and £689 million at 31 March 2003. Bank overdrafts
    and temporary borrowings, which are repayable in less than one year, were
    £37.1 million at 31 March 2005, compared with £32.6 million at
    31 March 2004 and £157.5 million at 31 March 2003. The weighted average
    rate of interest on bank overdrafts and temporary borrowings was 5.16 per
    cent (2004: 3.87 per cent, 2003: 4.25 per cent). The group had available committed
    bank facilities of £875.0 million (2004: £775.0 million, 2003:
    £935.0 million) of which £873.4 million was unutilised at 31 March
    2005 (2004: £773.1 million, 2003: £934.2 million). Of the amounts
    unutilised, £100.0 million expire within one year, £323.4 million
    expire after one year but in less than two years, and the remaining £450.0
    million expire in more than two years. Although unutilised
    during the financial year ended 31 March 2005, 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. The notes
    will have a maturity (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 £875 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 EUR 5 billion medium-term note
    programme which provides for the periodic issuance by United Utilities, United




|22 | United Utilities
      Annual Report & Accounts 2005
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Table 7:

During the last financial
  year, the group received £556 million of term funding. The details of
  this financing are as follows:

|                   | Rate     |     | £m    | 
|------------------ | -------- | --- | ----- | 
|                   |          |     |       | 
|Medium-term notes: |          |     |       | 
|GBP  2035         | 5%       | (1) | 200.0 | 
|USD  2009         | Floating | (2) | 5.7   | 
|EUR  2020         | 4.25%    | (3) | 350.4 | 
|                   |          |     |       | 

|Notes:
|------
|(1)   
|(2)   
|(3)   

Table 8: Interest rate
  risk

|                                         |                     |   | Market
      value change |   |                        |   | Market
      value change                        |  
|---------------------------------------- | ------------------- | - | ------------------------- | - | ---------------------- | - | ------------------------------------------------ | -
|                                         |                     |   |                           |   |                        |   |                                                  |  
|                                         |                     |   | +1%                       |   | 1%                    |   |                                                  |  
|                                         | Market
      value  |   | movement                  |   | movement               |   | Market
      value                               |  
|                                         | 31
      March 2005 |   | in
      interest rate    |   | in
      interest rate |   | 31
      March 2004                              |  
|Interest rate
      movement             | £m                  |   | £m                        |   | £m                     |   | £m                                               |  
|                                         |                     |   |                           |   |                        |   |                                                  |  
|Long-term debt                           | (5,002              | ) | 296                       |   | (342                   | ) | (4,568                                           | )
|                                         |                     |   |                           |   |                        |   |                                                  |  
|Interest rate
      swaps                | (47                 | ) | (8                        | ) | 25                     |   | (44                                              | )
|                                         |                     |   |                           |   |                        |   |                                                  |  
|Currency swaps                           | (8                  | ) | (108                      | ) | 126                    |   | 100                                              |  
|                                         |                     |   |                           |   |                        |   |                                                  |  
|                                         |                     |   |                           |   |                        |   |                                                  |  
|Table 9: Foreign
      currency risk     |                     |   |                           |   |                        |   |                                                  |  
|                                         |                     |   | Market
      value change |   |                        |   | Market
      value change                        |  
|                                         |                     |   |                           |   |                        |   |                                                  |  
|                                         |                     |   | +10%                      |   | 10%                   |   |                                                  |  
|                                         |                     |   | movement                  |   | movement               |   |                                                  |  
|                                         | Market
      value  |   | in
      foreign          |   | in
      foreign       |   | Market
      value                               |  
|                                         | 31
      March 2005 |   | exchange
      rate       |   | exchange
      rate    |   | 31
      March 2004                              |  
|                                         | £m                  |   | £m                        |   | £m                     |   | £m                                               |  
|                                         |                     |   |                           |   |                        |   |                                                  |  
|Long-term debt                           | (5,002              | ) | 257                       |   | (304                   | ) | (4,568                                           | )
|                                         |                     |   |                           |   |                        |   |                                                  |  
|Currency swaps                           | (8                  | ) | (252                      | ) | 298                    |   | 100                                              |  
|                                         |                     |   |                           |   |                        |   |                                                  |  
|                                         |                     |   |                           |   |                        |   |                                                  |  
|Table 10: Contractual
      obligations  |                     |   |                           |   |                        |   |                                                  |  
|                                         |                     |   |                           |   |                        |   |                                                  |  
|                                         |                     |   |                           |  
|                                         |                     |   | Less
      than           |   |                        |   |                                                  |  
|                                         |                     |   | one
      year            |   | 2-3
      years        |   | 4-5
      years                                  |  
|                                         |                     |   | £m                        |   | £m                     |   | £m                                               |  
|                                         |                     |   |                           |   |                        |   |                                                  |  
|Long-term debt                           |                     |   | 467.3                     |   | 988.0                  |   | 887.0                                            |  
|Interest on long-term
      debt         |                     |   | 273.8                     |   | 503.4                  |   | 330.2                                            |  
|Capital lease
      obligations          |                     |   | 0.8                       |   | 11.3                   |   | 16.2                                             |  
|Operating leases                         |                     |   | 13.8                      |   | 21.3                   |   | 15.8                                             |  
|Purchase obligations                     |                     |   | 67.1                      |   | 19.1                   |   | 3.5                                              |  
|Capital commitments                      |                     |   | 277.9                     |   | 42.8                   |   | 7.1                                              |  
|                                         |                     |   |                           |   |                        |   |                                                  |  
|Total contractual
      cash obligations |                     |   | 1,100.7                   |   | 1,585.9                |   | 1,259.8                                          |  
|                                         |                     |   |                           |   |                        |   |                                                  |  
|                                         |                     |   |                           |   |                        |   |                                                  |  
|Table 11: Financial
      guarantees     |                     |   |                           |   |                        |   |                                                  |  
|                                         |                     |   |                           |   |                        |   | Amount
      of commitment expiration per period |  
|                                         |                     |   |                           |  
|                                         |                     |   | Less
      than           |   |                        |   |                                                  |  
|                                         |                     |   | one
      year            |   | 2-3
      years        |   | 4-5
      years                                  |  
|                                         |                     |   | £m                        |   | £m                     |   | £m                                               |  
|                                         |                     |   |                           |   |                        |   |                                                  |  
|Guarantees                               |                     |   | 134.9                     |   | 224.5                  |   | 5.0                                              |  
|                                         |                     |   |                           |   |                        |   |                                                  |  
|Total commercial
      commitments       |                     |   | 134.9                     |   | 224.5                  |   | 5.0                                              |  
|                                         |                     |   |                           |   |                        |   |                                                  |  



|United
      Utilities Annual Report & Accounts 2005 | 23
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Operating and financial reviewOperating and financial
  performance review continued

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 the US bond market allowing the holding company
  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 debt is held are disclosed in note 23 to the consolidated financial
  statements. The group arranged
  £50 million of new five-year medium-term committed bank facilities and
  new facilities totalling £100 million were also agreed. In addition, an
  agreement was signed for £200 million of funding from the European Investment
  Bank which remains undrawn. The groups
  term loans were £4,884.3 million at 31 March 2005, compared with £4,356.0
  million at 31 March 2004 and £3,715.9 million at 31 March 2003. 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 £2,252.1 million (2004: £1,852.9 million, 2003: £1,932.0
  million) and are at floating rates on £342.6 million (2004: £361.5
  million, 2003: £359.0 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 LIFFE. The average interest rate for 2004/05 was 7.4 per cent, compared with
  7.0 per cent in 2003/04 and 6.9 per cent in 2002/03. Quantitative and
  qualitative disclosures about market riskRisk
  managementThe
  principal financial market risks faced by the company are the risks of interest
  rate movements and foreign currency movements. Interest rate
  and foreign currency managementThe
  company 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 debt at effective fixed rates
  of interest for a period greater than one year is set in conjunction with the
  level of floating rate debt 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 company has limited exposure to
  foreign currency exchange rate movements. Interest rate management and funding
  policies are set by the board. The company 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 8 and 9 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
  cash flows at market rates and prices. The market values for interest rate risk
  are calculated by using a standard zero coupon discounted cash flow pricing
  model. For long-term debt,
  a favourable change in market value results in a decline in the value of debt.
  For other financial instruments, a favourable change in market value results
  in an increase in market value.




Interest rate riskThe
  sensitivity analysis in table 8 assumes an instantaneous one per cent (100 basis
  points) move in interest rates for all maturities and all currencies from their
  levels at 31 March 2005 and 31 March 2004, with all other variables held constant. The movement in
  market value of debt and instruments hedging debt will not result in any immediate
  change to the groups financial statements, since market values are not
  recognised on the group balance sheet. An increase in short-term interest rates
  of all currencies of one per cent would decrease group net interest payable
  for the financial year by £3.1 million (2004: decrease of £4.5 million,
  2003: increase of £2.0 million). Foreign currency
  riskThe
  sensitivity analysis in table 9 assumes an instantaneous 10.0 per cent change
  in foreign currency exchange rates against sterling from their levels at 31
  March 2005 and 31 March 2004, 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 a weakening of sterling. Market value changes
  from movements in currency rates in long-term debt, currency swaps and forward
  contracts hedging debt are taken through the groups statement of total
  recognised gains and losses in accordance with the hedge accounting requirements
  in SSAP 20. Substantially all
  cash and cash equivalents are held in sterling and sterling denominated instruments. Contractual obligationsTable
  10 summarises the contractual obligations of the group and the effect such obligations
  are expected to have on the groups liquidity and cash flow in future periods. Table 11 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 £654.4 million of financial guarantees relates
  to borrowings by United Utilities Water and United Utilities Electricity from
  the European Investment Bank. The capital commitments
  of the group as at 31 March 2005 were £332 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 2005. Table 10 does not
         include the groups contributions to pension schemes. A lump sum
         contribution  of £320 million was made on 31 March 2005 split
         between the groups
  two defined benefit pension schemes. The group does not expect to make any
         further  cash contributions during the 2005-10 period into the defined
         benefit pension
  schemes although the results of the next actuarial valuation will be incorporated
          into the 2007/08 financial statements. Subsequent actuarial valuations
         will influence contributions
  payable in future years. Employers contributions in the year ended 31
   March 2005 for the defined benefit pension schemes were £49.2 million,
    excluding the lump sum contribution. Table 10 includes
  interest payments on long-term debt held at 31 March 2005. This does not take
  into account incremental financing in respect of future capital commitments
  and the refinancing of existing long-term debt. It also does not take into account
  interest receivable on cash balances. Floating interest rates for certain debt
  items, which are not fixed are assumed to remain constant until the debt item
  is repaid. The interest payments shown exclude the impact of derivative instruments,
  where applicable.




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      Annual Report & Accounts 2005
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Off-balance sheet arrangements
  Joint venturesThe 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. Excluding the provision for joint venture
  losses in accordance with FRS 9, for which the company has no financial commitment,
  the maximum exposure of the group is limited to the carrying value of the investments,
  which was £70.5 million at 31 March 2005 (2004: £70.0 million),
  and the trade debtors due from the joint ventures of £14.6 million at
  31 March 2005 (2004: £11.1 million). All joint venture arrangements have
  been consolidated into the companys results on a gross equity 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, while other parties will provide their skills
  to the joint 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 guaranteesAs 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 2005, where a financial limit has been specified, were £84.1
  million (2004: £146.8 million, 2003: £133.6 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 guarantee for
  £1.2 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. 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 £53.8 million at 31 March 2005. 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 £12.0 million at 31 March 2005. Guarantees totalling
  £17.1 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 on 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 three 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. SummaryManagement has reviewed
  the business plan and considers that the group has sufficient liquidity to meet
  the anticipated financial commitments for the next twelve months. In total,
  at 31 March 2005, committed facilities of £773.4 million expiring in more
  than one year, which, together with cash and short-term investments of £861.3
  million and undrawn funding from the European Investment Bank of £200
  million, provides substantial pre-funding for the group. ACCOUNTING ISSUESINTERNATIONAL FINANCIAL
  REPORTING STANDARDSFrom 1 April 2005,
  the group will be required to comply with International Financial Reporting
  Standards (IFRS) endorsed for use in the European Union. The first financial
  information to be reported by the group in accordance with IFRS will be for
  the six months ending 30 September 2005. The most significant
  areas of impact of IFRS for the groups reported results are detailed below.
  However, this is not intended to represent an exhaustive list of differences.
  Any new standards or interpretations issued by the International Accounting
  Standards Board (IASB) will be assessed and considered by the group on an individual
  basis. •
    Fixed
            asset accounting – the most significant impact of IAS 16 for
            the group relates
      to the accounting for infrastructure assets within United Utilities Water.
            The paragraphs within FRS 15 that specifically permit renewals accounting
            are not present within IAS 16.
      Therefore,
      it will be necessary to assess the number of segments within the water
      infrastructure  network and, for each, determine a useful life and residual
      value so as
      to depreciate the segments individually. Furthermore, the classification
       between operating expenditure and capitalised costs of amounts spent to

      maintain the network will also be reassessed under the new standard.Since
      the net book value of the infrastructure network was determined using an
      accounting policy not compliant with IFRS, it will be necessary to establish
      a deemed cost for the opening balance sheet value of the infrastructure
      network by reference to the fair value at the date of transition (in accordance
      with IFRS 1, First-time Adoption of International Financial Reporting
      Standards).•
    Pensions –
            under SSAP 24, any pension scheme surplus or deficit identified at
            the most
      recent actuarial valuation is recognised gradually through the profit and
            loss account over the average expected future working lifetime of
            current
      employees. Under IAS 19, any legal and constructive obligation for post
            employment benefit plans must be immediately recognised as an asset
      or




|United
      Utilities Annual Report & Accounts 2005 | 25
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Operating and financial review
  Operating and financial performance
  review continued

liability
      on the balance sheet.•
    Financial
      instruments – all derivative instruments, which under UK GAAP represent off
      balance sheet instruments, are to be carried at fair value within the balance
      sheet under IAS 39. Each year, the movement in fair value of the derivatives
      is recognised in the income statement. An election is provided within IAS
      39 such that, where an effective hedge relationship can be demonstrated
      between a derivative instrument and an underlying item of debt, the carrying
      value of the debt item will be adjusted to reflect the risks being hedged.
      When presented in this way, the movement in debt should theoretically offset
      the movement in derivatives; reducing the volatility within the income statement.
      However, any ineffective portions of such hedges are recognised immediately
      within the income statement. In the absence of any hedge relationships,
      debt is held at amortised cost, with any movements in the fair value of
      derivatives therefore potentially introducing significant volatility to
      the income statement.The
      group has elected to apply IAS 39 in relation to financial instruments from
      1 April 2005, thereby taking advantage of the exemption afforded by the
      standard from its application to 2005 results when presented in accordance
      with IFRS.•
    Deferred
      tax – unlike UK GAAP, IAS 12 does not permit discounting of the deferred
      tax provision. CRITICAL ACCOUNTING
  POLICIESThe group prepares
   its consolidated financial statements in accordance with accounting principles

  generally accepted in the United Kingdom and reconciles its net income, shareholders
  equity and financial position to US GAAP, as shown in the summary of differences
   between UK and US GAAP in note 37 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 note 1 of the consolidated financial statements.
  The following paragraphs detail the policies the group believes to have the
  most significant impact on the annual results under UK and US GAAP. Carrying value
  of long-lived assetsThe groups accounting
  policy for tangible fixed assets is detailed in note 1(g) of the consolidated
  financial statements. The carrying value of tangible fixed assets under UK GAAP
  as at 31 March 2005 was £8,234.9 million. Additions to tangible fixed
  assets totalled £894.3 million and the depreciation charge was £365.9
  million in the year ended 31 March 2005. The estimated useful economic lives
  of fixed assets 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 fixed asset 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
  UK and US GAAP, the group is required to evaluate the carrying values of fixed
  assets 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 cash flows, growth rates and discount rates of the income generating units
  under review. In the year




ended 31 March 2003,
  the group reviewed the carrying value of its telecommunications assets, in accordance
  with FRS 11, Impairment of Fixed Assets and Goodwill, under UK GAAP.
  Based on an assumed pre-tax nominal weighted average cost of capital of 16 per
  cent, and a long-term real growth rate of 2.25 per cent, an adjustment to value
  of £25.5 million was made representing £14.6 million tangible assets,
  £8.6 million definite-lived intangible assets and £2.3 million goodwill.
  Under US GAAP, there was no indication of impairment of tangible or definite-lived
  intangible assets in the telecommunications business on an undiscounted cash
  flow basis in accordance with Statement of Financial Accounting Standard (SFAS)
  144, Accounting for Impairment or Disposal of Long-Lived Assets.
  Furthermore, under SFAS 142, Goodwill and Other Intangible Assets,
  there was no impairment for goodwill. Therefore a reconciling item is recorded
  as discussed in note 37(g) of the summary of differences between UK and US GAAP. Renewals accountingUnder UK GAAP, the
  depreciation charge for infrastructure assets is the estimated level of annual
  expenditure required to maintain the operating capability of the network which
  is based on the groups asset management plan, which has been certified
  by Halcrow Management Sciences Limited, an independent infrastructure management
  consultant approved by Ofwat. Variations between actual infrastructure spend
  and estimated spend are included in the balance sheet, with the principle being
  to equalise the effect of annual spend variations on the charge
  to the profit and loss account. Therefore, the independently certified asset
  management plan has an impact on the groups operating profit and changes
  in the plan assumptions could give rise to a different operating profit. These
  assumptions include judgements relating to the condition and performance of
  infrastructure assets. Under US GAAP, the depreciation charge reflects actual
  expenditure in the year and therefore, as discussed in note 37(b) in the summary
  of differences between UK and US GAAP, a reconciling item is recorded. Deferred taxThe group accounts
  for deferred tax on a discounted basis, as permitted by UK GAAP. The deferred
  tax provision under UK GAAP as at 31 March 2005 is £395.2 million. The
  balance sheet provision is discounted using the rate of interest at the balance
  sheet date on UK gilts with similar maturity dates and currencies to those of
  the deferred tax assets and liabilities. Therefore, the group uses 15+years
  UK gilt rate to reflect the long-life nature of infrastructure and operational
  assets. An increase or decrease in applicable discount rates of 0.1 per cent
  would change the balance sheet provision at 31 March 2005 by approximately £9
  million and the tax charge, for the year then ended, by the same amount. Discounting
  is not permitted under US GAAP and therefore, as discussed in note 37(m) in
  the summary of differences between UK and US GAAP, a reconciling item is recorded
  for the discounting impact. A deferred tax asset is regarded as recoverable
  and therefore recognised only when, on the basis of available evidence, it is
  regarded as more likely than not that there will be suitable taxable profits
  from which the future reversal of the underlying timing differences can be deducted.
  Changes to managements view of the recoverability of deferred tax assets
  could give rise to different tax charges. Revenue recognitionUnder UK GAAP, the
  group recognises revenue generally at the time of delivery and when collection
  of the resulting debt 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




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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, business process outsourcing and
  telecommunications), 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;•
    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 contractually identified against delivered
      services; and•
    Capacity
      sales pursuant to Indefeasible Rights of Use (IRUs) agreements
      are treated as operating leases with profit being recognised over the term
      of the agreement. 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 37(k) in the summary of differences
        between UK
  and US GAAP in the consolidated financial statements. Under both UK 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 and geographic region is contained in note
        2 to the
    consolidated financial statements. Provision for
  doubtful debtsAt each balance sheet
  date, United Utilities and each of its subsidiaries evaluate the collectability
  of trade debtors and record provisions for doubtful debts 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 debt collected may differ from the estimated levels of recovery, which could
  impact operating results positively or negatively. As at 31 March 2005, the
  groups gross trade debtors were £320.4 million and the provision
  for doubtful debts was £127.2 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 outside
  counsel, available facts, identification of other potentially responsible parties
  and their ability to contribute, and prior experience. In accordance with UK
  GAAP, 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 are either 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 UK and US GAAP. Under UK GAAP, goodwill is amortised
  to nil by equal annual instalments over the estimated useful life, generally
  not exceeding 20 years. Goodwill is assessed for impairment whenever events
  or circumstances might indicate that it may be impaired. As at 31 March 2005,
  the net book value of goodwill under UK GAAP was £124.5 million (including
  goodwill related to joint ventures within fixed asset investments) and the amortisation
  charge for the year then ended was £16.2 million. Under 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 reporting units.
  Estimates of fair value are consistent with market information and the groups
  plans and forecasts. Under US GAAP, the carrying value of goodwill as at 31
  March 2005 was £1,029.2 million. This is substantially higher than that
  reported under UK GAAP due to a significant amount of goodwill written off directly
  to reserves under UK GAAP prior to the adoption of FRS 10. PensionsThe 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 UK GAAP, the pension cost under SSAP 24 is assessed
  in accordance with the advice of a firm of actuaries based on the latest actuarial
  valuation and assumptions determined by the actuary and consists of a regular
  cost and variations. 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 26 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 37(a) in the
  summary of differences between UK and US GAAP in the consolidated financial
  statements. Both UK 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. Under UK
  GAAP, changes to these assumptions do not necessarily give rise to different
  operating results until the next actuarial review is performed as the regular
  cost represents a reasonably stable percentage of pensionable payroll and variations
  are generally spread over the expected remaining service lives of current employees
  in the scheme. Changes to these assumptions under US GAAP could give rise to




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Operating and financial reviewOperating and financial performance review continued

different operating results. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTSFrom 1 April 2005, the group will be required to comply with IFRS endorsed for use in the European Union. Further details are provided on page 25. Recent US accounting pronouncementsFASB
Statement No. 151 (SFAS 151), Inventory Costs, issued
in November 2004, provides guidance for accounting for abnormal amounts of idle
facility expense, freight handling  costs and spoilage and allocation of fixed
production overhead. This accounting standard is applicable for accounting periods
beginning after 15 June 2005 and will be adopted by the group from 1 April 2006.
Adoption of SFAS 151 is not expected to
have a material impact on the consolidated financial position, results of operations
or cash flows. FASB Statement No
        152 (SFAS 152), Accounting
  for Real Estate Time-Sharing Transactions, issued in December 2004, amends

existing standards SFAS 66 Accounting for Sales of Real Estate and
  SFAS 67 Accounting for Costs and Initial Rental Operations of Real Estate
  Projects to
  make them consistent with AICPAStatement of
Position 04-2, Accounting for Real Estate TimeSharing Transactions.
This accounting standard is applicable for accounting periods beginning after
15 June 2005 and will be adopted by the group from 1 April 2006. Adoption of
SFAS 152 is not expected to have a material impact on the consolidated financial
position, results of operations or cash flows. FASB Statement No. 153 (SFAS
153), Exchange of Nonmonetary Assets, issued in December 2004,
is part of the IFRS convergence project. SFAS 153 edits the list of exceptions
to  entities required to prepare accounts on a non-going concern basis. This
accounting standard is applicable for accounting periods beginning after 15 June
2005 and will be adopted by the group from 1 April 2006. Adoption of SFAS 153
is not expected
to have a material impact on the consolidated financial position, results of
operations or cash flows. FASB 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 will be adopted
  by the group from 1 April 2006. The group has not determined the effect, if any,
  of SFAS 123R, on the groups
  financial position, results of operations or cash
  flows. 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 will be effective as of 1 April 2005. The group has not determined the effect, if any, of FIN 47, on the groups
financial position, results of operations or cash flows. RESEARCH AND DEVELOPMENTUnited
Utilities undertakes research primarily to provide improved standards of service
to customers, together with
continuing improvements in business efficiency. The groups intention is
to strengthen its understanding of science and technology in relation to its
range of wastewater and water treatment processes, in order to ensure that treatment
plants are able to meet the required current and future standards. It also aims
to develop
new solutions for areas of its business (for example, looking at new processes
to render waste materials inert and to turn them into saleable products). New
methods are being investigated to determine the condition of assets, and ways
in which to improve maintenance methodologies to ensure the delivery of consistent
satisfactory performance and the maximisation of asset life. Work to support
the growth in connection of distributed electricity generation plant




to the groups electricity distribution
network is being pursued through a number of collaborative partnerships. Research
is also undertaken into current practices, for example in relation to health
concerns relating to drinking water standards. United Utilities 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 and with universities. Research
  and development expenditure by the group was £0.8 million in the year ended
  31 March 2005 (2004: £0.8 million, 2003: £0.8
  million). Patent portfolio managementThe company acquires patents in order to protect those ideas and inventions which it intends to exploit commercially. Patents are maintained for up to 20 years. There are currently 20 inventions
that have patents awarded in several jurisdictions. During the year ended 31
March 2005, these 20 active patents generated 28 patent renewals in 11 countries. The
  cost of maintaining patents was less than £50,000 per annum in each of
  the last three 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. SIGNIFICANT CHANGESManagement is not aware of any significant changes in the financial position of the company since 31 March 2005.




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Operating and financial reviewRisk management

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTSThis report contains certain forward-looking statements with respect to the financial condition, results of operations and business of the company. Statements that are not historical
facts, including statements about the company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 ofthe
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 FACTORSIn
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 and A shares or ADSs. The group operates an internal control system to evaluate and manage risks as described in the section Internal control on
page 51. Turnover of the groups regulated
businesses is substantially influenced by regulators, which could adversely affect
profitabilityThe turnover
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 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 regulatory assumptions concerning operating expenses, required capital
expenditure and revenue forecasts proving not to be realistic. 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. During the year ended 31 March 2004, the group announced a two-stage rights issue which raised £501.2 million (net of costs) from the first stage.
The second stage, due in June 2005, is expected to raise a further £510
million (gross). However, there can be no assurance that cash flows from operations
will not decline, or that the second stage of the rights issue will give rise
to the expected cash inflow, 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 dialogue
with Ofwat and the Environment 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. 2000-2005) 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
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


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Operating and financial reviewRisk management continued

performance were 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 United Utilities 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. On some of
the occasions that the group has failed to comply, it has been fined or otherwise
sanctioned 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. While 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, whereby 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 resulting from man-made sources. In the event that United
Utilities water supply is contaminated and it 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 its
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, which could adversely affect profitabilityThrough Vertex,
the groups activities in business process outsourcing are expanding into new markets and territories and achieving increased segmental operating profits (2005: £26.4
million; 2004: £25.1 million; 2003: £18.8 million) and increased sales external to the group (2005: £308 million; 2004: £281 million; 2003: £220 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 skills. In addition,
Vertex has significantly expanded its operations into financial services with
the recent acquisition of Marlborough Stirling 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. Deficits in pension schemes may require the group to make additional contributions to the scheme 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. As a consequence of improved life expectancy, together with
the downturn in the equity markets and lower interest rates, the schemes were
estimated to have a combined post-tax deficit of £55.7 million as at 31

March 2005, compared to a post-tax deficit of £264.4 million at 31 March
2004 and of £298.1 million at 31 March 2003. 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. The
group, however, 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




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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. Weak conditions in the telecommunications
industry could continue and cause further losses in the groups telecommunications
businessYour Communications
continues to incur losses on an annual basis. There is a risk that the over-capacity
in the telecommunications market may continue to impose price pressures for some
time,
leading to operating losses being incurred in the medium term. LITIGATIONNOSS 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 UK GAAP.


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Operating and financial reviewCorporate responsibility

The group believes that being responsible in the way it conducts its operations makes sound business sense. Active management of 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 ETHICSThe company
has adopted a set of business
principles which comply with the SECs definition of a code of ethics. The company will continue to develop them in line with best practice. A copy of
the Business Principles booklet is available by mail free upon request
from the company secretary, United Utilities PLC, Dawson House, Great Sankey,
Warrington, Cheshire, England, WA5 3LW or may be viewed online at
www.unitedutilities.com. OUR APPROACHThe 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. Two complementary strands to this
approach  corporate social responsibility (CSR) and sustainable development (SD)  are now integrated within the businesses and managed together. The
groups corporate responsibility policies are considered as part of the
business planning process and environmental performance is a personal objective
for each member of the Executive Leadership Team. The focus of the groups programmes is determined by identifying and prioritising its impacts and opportunities. An important part of the approach is stakeholder consultation. This provides
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 and, in turn, drives the reporting process. 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. This year, United Utilities North Wests business management system gained ISO 14001 accreditation. The majority of the groups
  infrastructure management operations are now accredited to the ISO 14001 standard. Benchmark exercises help to track performance, drive continual improvement and seek out best practice. KEY IMPACT AREASEnvironmentThe group
continues to manage its impact on the environment and, where possible, enhance
it through the implementation
of its sustainable development plans and other environmental objectives. The
  groups most significant environmental impact in recent years has been the contribution made to cleaning up the north wests rivers and coastal waters through sustained investment in the wastewater network. 36 of the regions 37
  bathing waters now meet strict EU standards. The regions rivers are cleaner
  than at any time in the last century. Key areas of environmental interest
for stakeholders are drinking water quality, climate change and sustainable energy;
compliance with legislation and waste minimisation/recycling. Although the
groups major capital investment programmes bring big environmental benefits,
projects still have to be managed sensitively to limit any adverse environmental
impact during construction. The group also looks for opportunities to make investments
more sustainable. For example, in upgrading the treatment works at Franklaw,
Lancashire, we were able to install a 1MW hydroelectric scheme which offsets
carbon emissions.




CommunityThe group has
identified three focus areas for community activity: environment, social inclusion
and education and
training and has developed strategic partnerships with organisations active in
these
areas  Groundwork, the Princes Trust and Young Enterprise respectively.
Key topics of community interest for stakeholders are environmental education,
job creation and unemployment, consideration for neighbours, access and recreation.
During the year, a three-year partnership was announced with Liverpool Capital
of Culture 2008. MarketplaceCustomers and suppliers/contractors are two of our key stakeholder groups. The group has 3.1 million customers in north west England and well over 30,000 suppliers. Key areas of interest for these
stakeholders are standards of service, charging policy, the capital investment programme and business ethics. Environmental criteria are taken into consideration when appointing suppliers, and payments for some major contractors are now linked to
environmental and health and safety performance. Vertexs partnership with Westminster
City Council has helped it win the Council of the Year accolade in the national
Local Government Chronicle awards in March 2005. The partnership was also highly
commended in the category of Public/Private Partnership of the Year. The groups regulated businesses liaise with local authorities and residents groups
to ensure that any disruption to local communities during capital improvement
works is minimised. WorkplaceUnited Utilities values its employees. They are a key asset. Areas of interest for employees are work/life balance, health and safety, skills and job training and pensions. The groups health and safety
strategy continues to develop. External recognition was achieved both for performance
and the quality of reporting. During the year, the group secured a RoSPA Gold
Award for its approach to health and safety and its facilities management and
telecommunications companies gained certification to OSHAS 18001. Days lost through
accidents at work fell again during the year from 2,173 in the previous year
to 1,931
in 2004/05. More information on the groups stakeholder approach, identification of key impact areas and detailed information, performance data and discussion can be found within the stakeholder report, or
on the groups web site at www.unitedutilities.com. Performance highlightsDuring the year, United Utilities has made progress in both the Business in the Community Corporate Responsibility and Business in the Environment indices. It was ranked equal ninth 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 STOXX Sustainability Indices, the FTSE4Good index (at global, European and UK levels) and by its B2 rating in Morleys
Sustainability Matrix.


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GovernanceDirectors and senior managers

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 directors
The companys constitution (the articles of association)
provides that a director appointed by the board must retire at the annual general
meeting of the company next following such appointment. David Jones and Nick
Salmon were appointed as additional non-executive directors by the board on 27
January 2005 and 4 April 2005 respectively and Tom Drury was appointed as an
additional executive director on 9 May 2005. All three are
therefore retiring and offering themselves for appointment at the 2005 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 2005 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. Andrew Pinder and Norman Broadhurst were last appointed
 at the annual general meeting held in 2002 and are therefore retiring and are
offering themselves for reappointment at the 2005 annual general meeting. John Seed, having completed nine years of service, will stand down at the annual general meeting in 2005 and will not seek reappointment. EXECUTIVE DIRECTORS
John Roberts,
CBE (age 59)  Chief
executive
John Roberts
joined the board as chief executive on 1 September 1999. He is a non-executive
director of Volex Plc and
chairman of the Merseyside Private Sector Group, MIDAS (Manchester Inward Development
Agency Services) and the North West Business Leadership Team. He is also on the
board of the Mersey Partnership and is a member of the University of Liverpools Council. John joined Manweb in 1967 upon graduation from Liverpool
University. He was appointed finance director in 1984 and became chief executive in 1992. He left Manweb in 1995, following the companys
takeover by Scottish Power, and spent some time as a freelance consultant in
the sector. He joined Hyder plc in 1996, initially as chief executive of South
Wales Electricity and then as chief executive of Hyder Utilities from 1997. He
has been president of the Electricity Association, chairman of the Electricity
Pensions Trustee Limited, a member of
the CBI Wales Council and a member of the Royal Commission on Environmental Pollution. Simon Batey (age 51)  Group
finance director
Simon Batey
joined the board as group finance director on 1 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 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,
and worked in
a number of management posts. Charlie Cornish (age 45)  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 HR 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 a director of Young Enterprise UK. Tom Drury (age 43)  Managing
director, Vertex
Tom Drury joined
the board as an executive director on 9 May 2005. He began his career with PricewaterhouseCoopers
and 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 57)  Managing
director, United Utilities Contract Solutions
Gordon 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. NON-EXECUTIVE DIRECTORS
Sir Richard
Evans (age 62)  Chairman
Sir Richard Evans was appointed a non-executive director on 1 September 1997 and chairman in January 2001. Born in the north west of England, he joined the Ministry of Transport and Civil Aviation in
1960 and, shortly afterwards, moved into the then newly-formed Ministry of Technology. In 1969, he joined the Military Aircraft Division of British Aircraft Corporation (BAC). In 1978, he was promoted to commercial director of what had then become
the Warton Division of British Aerospace (BAe). In January 1983, he was appointed deputy managing director for BAe Warton and 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 a director of the programme management companies for the Anglo/French Jaguar aircraft and for the Anglo/German/Italian
Tornado aircraft and 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 63)  Chairman
of the audit committee
Norman 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. He is also a
non-executive director of Cattles plc, Old Mutual plc and Tomkins plc. He was group finance director of Railtrack plc from 1994 to 2000.


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Governance******Directors
and senior managers continued**



David Jones, CBE
  (age 63)  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. Sir Peter Middleton
  (age 71)  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, chancellor
  of the University of Sheffield a member of the International Advisory Panel
  of the Monetary Authority of Singapore, on the board of the National Institute
  of Economic and Social Research and 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 61)  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 Dixons
  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 Fund, one the largest
  funds in the UK. Andrew Pinder, CBE
  (age 58)  Non-executive directorAndrew Pinder was
  appointed a non-executive director on 1 September 2001. As the e-Envoy to the
  UK government from 2001 to 2004, he was responsible to the Prime Minister for
  the delivery of internet access to all British citizens and businesses. He has
  since 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. 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. Nick Salmon (age
  52)  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. As a member
  of the three-person executive central management team, his responsibilities
  included strategy, mergers and acquisitions, communications and the worldwide
  marketing and sales network. From 1997 to 2001 he was executive vice president




of ABB Alstom Power.
  In his post as chief executive of Babcock International Group PLC from 1993
  to 1997, he led a major restructuring exercise, resulting in the repositioning
  of Babcock as a focused support services company. Prior to joining Babcock,
  he held senior management positions at GEC and GEC Alsthom in the UK and France,
  and previously spent eleven years with China Light & Power Company Limited
  in Hong Kong. John Seed (age 66)
   Chairman of the remuneration committeeJohn Seed joined the
  board as a non-executive director in March 1996. He was formerly chief executive
  of South Western Electricity plc. A chartered engineer, he spent 29 years in
  a number of engineering and general management posts with Eastern Electricity.
  He was appointed deputy chairman of South Western Electricity in 1986, becoming
  managing director at privatisation and then chief executive in 1992. He was
  chairman of Great Western Assured Growth plc from 1991 to 1997, of Windelectric
  Limited from 1996 to 1999 and of Warren Associates Limited from 1998 to 2001.
  He has held a number of other non-executive directorships in the public and
  private sectors including Prism Rail plc, Rebus Group plc and British Smaller
  Companies VCT plc. SENIOR MANAGERSThe following are
  the senior managers of the company who are not board directors, but are members
  of the executive leadership team: Linda Booth (age
  52)  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 holds an external directorship and is chair of a charity in Liverpool called
  Create Liverpool Trading Limited which helps the long-term unemployed back into
  work. She is also a member of the regional council of The Princes Trust. Hugh Logan (age
  55)  Managing director, Your CommunicationsHugh Logan joined
  Your Communications as its managing director in July 2000. He was previously
  director of sales and services at BT Cellnet where he oversaw the acquisition
  of Martin Dawes and managed a customer base of 3.4 million people. During a
  ten-year career at BT, he held a variety of senior management roles including
  managing director of BT Mobile, director of BT Cellnet, and managing director
  of BTC Lumina and DX Communications. Earlier in his career, he worked at Plessey,
  STC and Mercury. Ian Priestner (age
  48)  Group communications directorIan Priestner joined
  the company as group communications director on 16 October 2000, having previously
  been head of public policy and government relations at British Gas PLC. Tim Rayner (age
  44)  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.


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Governance******Directors
report**

Principal activitiesThe
  company is the holding company of a group which manages and operates electricity
  distribution, water and wastewater assets; manages infrastructure and business
  processes for its own and other businesses; and provides voice, basic and advanced
  communication services to the business customer market. A fuller description
  of business activities is contained within the operating and financial review
  on page 4. The principal subsidiary undertakings and joint ventures of the company
  are shown in note 14 to the consolidated financial statements. Business reviewThe chairmans
  statement on page 2 and the operating and financial review on pages 3 to 32
  report on the groups activities during the year and on likely future developments. The dividend for
  shareholdersThe directors are
  recommending a final dividend of 30.63 pence for each ordinary share for the
  year ended 31 March 2005 (15.315 pence for each A share), making a total for
  the year of 45.42 pence for each ordinary share (22.71 pence for each A share).
  Subject to shareholders approving this recommendation at the annual general
  meeting, the dividend will be paid on 26 August 2005 to shareholders on the
  register at the close of business on 10 June 2005. The business for
  the annual general meetingDetails of the resolutions
  to be proposed at the 2005 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 at page 13. The policy to encourage
  employee involvement through provision of share schemes is discussed within
  the directors remuneration report on page 37. Directors and senior
  managementThe names of the present
  directors and their biographical details are given on pages 33 and 34 together
  with details of the senior managers who form part of the executive leadership
  team but are not full board members. Directors
  and senior managers interests in sharesThe directors and
  their immediate families had the following interests in shares as at the financial
  year ended 31 March 2005 and as at 1 June 2005, all of which were beneficial
  interests, in the companys ordinary and A shares and options to subscribe
  for shares. None of the directors or senior managers hold more than one per
  cent of either the ordinary or the A share capitals 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 1 June 2005,
  the directors and senior managers (17 persons) of United Utilities held a total
  of 330,486 ordinary shares in the company representing 0.059 per cent of the
  issued ordinary share capital. The individual interests of the directors in
  ordinary shares are shown below:




Table 12:At
        1 April 2004or
        date of
      At
        31 March
      At
        1 Juneappointment
        if later*
      2005
      2005John Roberts
      92,054
      
      110,173
      
      110,245Simon Batey
      16,696
      
      82,401
      
      82,447Charlie Cornish
      
      
      46
      
      93Tom Drury
      n/a
      
      n/a
      
      20,123Gordon Waters
      51,062
      
      44,276
      
      44,322Sir Richard
        Evans
      245
      
      245
      
      245Norman Broadhurst
      341
      
      341
      
      341David Jones
      
      
      
      
      Sir Peter
        Middleton
      4,574
      
      4,574
      
      4,574Jane Newell
      4,356
      
      4,356
      
      4,356Andrew Pinder
      4,000
      
      4,000
      
      4,000Nick Salmon
      n/a
      
      n/a
      
      John Seed
      5,550
      
      5,550
      
      5,550 Notes:•
    Amounts
      shown as at 1 April 2004 for executive directors include ordinary shares
      held within the deferred share plan which matured during the year. Further
      details are available in the directors remuneration report on pages
      37 to 48.•
    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 2005. As at 1 June 2005, United Utilities Employee
      Share Trust Limited continued to hold 52,500 ordinary shares. 2.Interests in A sharesAs at 1 June 2005, the directors and senior managers (17 persons) of United
  Utilities held a total of 116,999 A shares in the company representing 0.038
  per cent of the issued A share capital. The individual interests of the directors
  in A shares are shown in table 13. Table 13:At
        1 April 2004or
        date of
      At
        31 March
      At
        1 Juneappointment
        if later
      2005
      2005John Roberts
      40,222
      
      40,222
      
      40,222Simon Batey
      181,190
      
      44,127
      
      44,127Charlie Cornish
      
      
      
      
      Tom Drury
      n/a
      
      n/a
      
      5,323Gordon Waters
      26,170
      
      7,253
      
      7,253Sir Richard
        Evans
      136
      
      136
      
      136Norman Broadhurst
      189
      
      189
      
      189David Jones
      
      
      
      
      Sir Peter
        Middleton
      2,541
      
      2,541
      
      2,541Jane Newell
      2,419
      
      2,419
      
      2,419Andrew Pinder
      2,222
      
      2,222
      
      2,222Nick Salmon
      n/a
      
      n/a
      
      John Seed
      3,082
      
      3,082
      
      3,082 3.
  Interests in share optionsAs at 1 June 2005, the directors and senior managers (17 persons) of United
  Utilities held options to purchase 15,900 ordinary shares in the company representing
  0.003 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 predecessor, the executive share option scheme.
  The individual interests of the directors in share options are shown in table
  14.


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Governance******Directors
report continued**



Table 14:At
        1 April 2004or
        date of
      At
        31 March
      At
        1 Juneappointment
        if later
      2005
      2005John Roberts
      4,139
      
      
      
      Simon Batey
      3,763
      
      1,751
      
      1,751Charlie Cornish
      
      
      
      
      Tom Drury
      n/a
      
      n/a
      
      3,772Gordon Waters
      3,030
      
      3,030
      
      3,030 Note:•
    Non-executive
      directors do not participate in the companys share option plans. Purchase of own sharesAt
  the annual general meeting held on 30 July 2004, the company was authorised
  by the shareholders to purchase, in the market, up to 55,721,369 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 2005 annual general meeting
  to renew the authority for one year. Fulfilling social
  and environmental responsibilitiesAs described in the
  corporate responsibility review on page 32, 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 web site. Political and charitable
  donationsCharitable donations
  by the group in the year amounted to£1,312,774
  (2004  £1,335,759). 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 2002 annual general meeting an authority was taken to
  cover such expenditure. Pursuant to that authority, in the year, the company
  incurred costs of £12,845 (2003  £6,217) 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 2005 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 1 June 2005,
  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 15:Company
      Date
        notified
      
      No.
        of shares
      
      %Barclays PLC
      12/04/2005
      
      16,835,297
      
      3.01Sprucegrove
        InvestmentManagement
        Ltd
      07/07/2003
      
      17,950,003
      
      3.02




At 1 June 2005,
  the directors were also aware of the following notifiable beneficial interests
  of greater than three per cent in the companys issued A share capital: Table 16:Company
    Date
      notified
    
    No.
      of shares
    
    %Barclays PLC
      05/04/2005
    
      18,195,774
    
    5.88J. P. Morgan
      & Chase Co.
    20/04/2005
    
    28,175,365
    
    9.11Sprucegrove
      InvestmentManagement Ltd
    04/02/2004
    
    9,539,973
    
    3.08UBS AG
    28/04/2005
    
    24,828,359
    
    8.03 Holders of all ordinary
  shares, including those held through ADSs have the same voting rights. Holders
  of A shares have the same voting rights as ordinary shareholders, save that,
  on a poll, each holder of A shares shall have only one vote for every two A
  shares held. As of 20 May 2005,
  there were 116 registered holders of 47,874 ordinary shares with addresses in
  the US, constituting less than one per cent of the ordinary shares in issue
  at that date and ten registered holders of 3,497 A shares with addresses in
  the US, constituting less than one per cent of the A shares in issue at that
  date. In addition, at 18 May 2005 there were 61 registered holders of 15,275,461
  United Utilities PLC ADSs (representing 30,550,922 ordinary shares) with an
  address 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 36 to the consolidated financial statements on page
  84. 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 54 days (2004  60 days) and 34 days (2004
   29 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. Independent auditorThe board is proposing
   to reappoint Deloitte & Touche LLP as auditor at the forthcoming annual
    general meeting. Approved by the
  board on 1 June 2005 and signed on its behalf by Tim RaynerSecretary


|   |                                                     
|-- | ----------------------------------------------------
|36 | United
      Utilities Annual Report & Accounts 2005

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Governance Directors remuneration report

Approach to reward
  The 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 all 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 through 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 25 to the accounts. RemunerationDuring the year the
  aggregate amounts of remuneration paid to all directors was £2,872,351
  (2004  £2,877,839). This includes annual bonuses earned and accrued
  in the year to 31 March 2005 but paid after the year end and the value of long-term
  incentives earned for the period ended 31 March 2004 paid during the year for
  executive directors. Details of amounts paid to each individual




director are shown
  in tables19 (non-executive directors) and 20 (executive directors). Table 20
  also shows the values of annual bonus earned by the executive directors in the
  previous year and paid in this year. During the year,
         the aggregate amount of remuneration (as defined above) paid to senior
        managers
  was £2,245,355 (2004  £2,373,342). Details of amounts paid
   to each individual officer are not required to be disclosed. However, their

  emoluments for the year are included, on a banded basis, in table 17. Table 17: Senior
  managers emoluments Total
      emolumentsNo.
      of managers
    £0001
      450.0+1
    350.0
       449.94
    250.0
       349.91
    <250.0 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, 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. The chairmans
  remuneration was reviewed during the year. Terms of appointmentNon-executive directors
  appointments are for an initial period of three years. They are subject to re-appointment
  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 re-appointment 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. They set out the expected time commitment
  and non-executives agree to devote sufficient time to meet what is expected
  of them. 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 periodically, 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




Table 18: Non-executive
  directors terms of appointment

|                                                                             | Date
      first   |  | Date
      of last |  | Re-appoint
      no |  |                     |  | Compensation    
|---------------------------------------------------------------------------- | ------------------ |  | ------------------ |  | ------------------- |  | ------------------- |  | ----------------
|                                                                             | appointed
      to |  | appointment        |  | later
      than    |  |                     |  | upon
      early
|                                                                             | board              |  | AGM
      in       |  | AGM
      in        |  | Notice
      period |  | termination     
|                                                                             |                    |  |                    |  |                     |  |                     |  |                 
|Sir Richard
      Evans                                                      | 01.09.1997         |  | 2004               |  | 2007                |  | none                |  | none            
|                                                                             |                    |  |                    |  |                     |  |                     |  |                 
|Sir Peter Middleton                                                          | 01.01.1994         |  | 2004               |  | 2005                |  | none                |  | none            
|                                                                             |                    |  |                    |  |                     |  |                     |  |                 
|Norman Broadhurst                                                            | 01.04.1999         |  | 2002               |  | 2005                |  | none                |  | none            
|                                                                             |                    |  |                    |  |                     |  |                     |  |                 
|David Jones                                                                  | 03.01.2005         |  | n/a                |  | 2005                |  | none                |  | none            
|                                                                             |                    |  |                    |  |                     |  |                     |  |                 
|Jane Newell                                                                  | 01.09.1996         |  | 2003               |  | 2006                |  | none                |  | none            
|                                                                             |                    |  |                    |  |                     |  |                     |  |                 
|Andrew Pinder                                                                | 01.09.2001         |  | 2002               |  | 2005                |  | none                |  | none            
|                                                                             |                    |  |                    |  |                     |  |                     |  |                 
|Nick Salmon                                                                  | 04.04.2005         |  | n/a                |  | 2005                |  | none                |  | none            
|                                                                             |                    |  |                    |  |                     |  |                     |  |                 
|John Seed                                                                    | 01.03.1996         |  | 2002               |  | 2005                |  | none                |  | none            
|                                                                             |                    |  |                    |  |                     |  |                     |  |                 
|Note:                                                                        |                    |  |                    |  |                     |  |                     |  |                 
|John
      Seed will not be seeking re-appointment at the AGM in July 2005. |                    |  |                    |  |                     |  |                     |  |                 



|United Utilities Annual
      Report & Accounts 2005 | 37
|---------------------------------------------------- | --

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Governance Directors remuneration report
  continued

chairmen of the audit and
  remuneration committees (Norman Broadhurst and John Seed respectively). Jane
  Newells fee includes an amount to reflect additional responsibilities
  as chairman of the trustees of the companys major pension schemes. She
  retired as chairman on 31 March 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, ShareSave
  scheme or ShareBuy. The company repays the reasonable expenses they incur in
  carrying out their duties as directors. Non-executive directors
  remunerationNon-executive directors
  fees (other than the chairmans) were increased on 1 May 2004. This was
  the first increase since May 2002. The base fee is £45,000 a year. The
  annual fee paid to Sir Peter Middleton, deputy chairman, is £80,000. The
  additional fees paid to the chairmen of the audit and remuneration committees
  are £10,000 and £7,500 a year respectively. On 1 July 2004, the
  chairmans fee increased to £198,000 a year. This was the first increase
  since his appointment in January 2001. The next review of non-executive directors
  fees will be in September 2005 and annually thereafter. Non-executive directors
  remuneration for the year to 31 March 2005 is set out in table 19. Table 19: Non-executive
  directors fees Total
        fees2005
      
      2004£000
      
      £000Sir Richard
        Evans
      193.5
      
      180.0Norman Broadhurst
      53.8
      
      40.0David Jones
      11.0
      
      Sir Peter
        Middleton
      78.3
      
      60.0Jane Newell
      73.3
      
      55.0Andrew Pinder
      89.2
      
      35.0John Seed
      51.5
      
      40.0Total
      550.6
      
      410.0 Notes:•
    David
      Jones was appointed to the board on 3 January 2005. His yearly fee is £45,000.•
    Nick
      Salmon was appointed to the board on 4 April 2005. His yearly fee is £45,000.•
    Since
      August 2004, Andrew Pinder received an additional fee in his capacity as
      a non-executive director of Vertex Data Science Limited. During the year
      fees of £45,000 were paid. These are included in the figure above.•
    Jane
      Newells fee includes an additional amount of £30,000 paid to
      her in her capacity as chairman of the companys pension schemes
      trustee. EXECUTIVE DIRECTORSThe 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 John Seed (Chairman), Norman Broadhurst, David Jones (from 24 January
  2005), Sir Peter Middleton, Jane Newell, Andrew Pinder and Nick Salmon (from
  4 April 2005), all non-executive directors. The committees terms of reference
  are available to shareholders on request and are on the companys web site
  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 management 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. Addleshaw Goddard and 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 company and other companies in the group. The committee is
  assisted by the chief executive (John Roberts), who is consulted on proposals
  relating to the remuneration of the other executive directors and senior executives
  and by Linda Booth, the group human resources director. The chief executive
  and group human resources director 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 2005. Individual attendance at the meetings
  is stated in the corporate governance report on page 49. During the year,
  matters considered by the committee included: •
    the
      2004 salary review for executive directors and other senior executives;•
    awards
      payable under the 2003/04 annual bonus plan and the measures and targets
      for the 2004/05 and 2005/06 plans;•
    the
      operation of the performance share plan, including implementing rule revisions
      agreed by shareholders at the 2004 AGM, the size of and performance conditions
      to apply to the 2004/05 grant of awards, the introduction of a cash based
      international plan to replace the performance share plan for a limited number
      of senior executives in overseas jurisdictions (in accordance with authority
      given by shareholders in 2000), monitoring ongoing performance against the
      conditions applying to previous grants and the vesting of the 2001/02 awards;•
    the
            implications of tax simplification legislation on pension policy
            and provision
      for executives;•
    monitoring
      of executive shareholdings against target; and•
    the
             form and content of the remuneration report in light of developments

      in stakeholder views and evolving best practice on disclosure. 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 outperform 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




|38 | United Utilities Annual
      Report & Accounts 2005
|-- | ----------------------------------------------------

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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. The committee aims
         to achieve an appropriate balance between fixed and variable rewards
        consistent
  with and reflecting the groups profile. 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. Chart 1 sets out
        the forward policy for an executive directors
     annual total reward opportunity. Chart 1: Executive
  directors annual total reward opportunity  Notes:•
    The
            figures are the percentage of total reward opportunity that each
            element represents.•
    Pension
            refers to defined contribution scheme with the highest matched regular
            company contribution of 14 per cent of basic pay.•
    The
            proportions for annual bonus and long-term incentive are based on
            maximum award opportunities of 60 per cent and 80 per cent of salary
            respectively; actual values will depend on performance.




Fixed rewards include
  basic salary, a car allowance or company car and fuel for private mileage, medical
  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. Awards are non-pensionable
  and provide the opportunity to earn up to a further 60 per cent and 80 per cent
  of basic salary (annual bonus and long-term incentive respectively) each year.
  Variable rewards account for over 50 per cent of total annual reward opportunity
  for executive directors. The company requires
  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 each element of executive directors remuneration is set
  out below. The board continually reviews its policy in the light of emerging
  best practice. Changes have been made to the structure of the 2005/06 annual
  bonus for executive directors and other managing directors with responsibility
  for specific businesses. Amendments have also been made to pension policy to
  be effective from the introduction of tax simplification legislation in 2006.
  These are reported below. During 2005/06,
  the committee intends to review the operation of the groups incentive
  arrangements in the light of evolving stakeholder interest and market practice
  and to ensure that rewards remain aligned to shareholder interests. 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. Any significant proposed changes will be submitted to the AGM in 2006
  for shareholder approval. Executive directors
  remuneration 2004/05Executive directors
  emoluments and the value of the long-term incentive vesting during 2004/05 are
  set out in table 20.




Table 20: Executive
  directors remuneration

|                |                    |  |                    |  |                      |  |                        |  |                |  |       |  |         |  |         |  |                           |  |      
|--------------- | ------------------ |  | ------------------ |  | -------------------- |  | ---------------------- |  | -------------- |  | ----- |  | ------- |  | ------- |  | ------------------------- |  | -----
|                |                    |  |                    |  |                      |  |                        |  |                |  |       |  |         |  |         |  | Long-term
      incentive
|                |                    |  |                    |  |                      |  |                        |  |                |  |       |  |         |  |         |  | vesting
      during the 
|                |                    |  |                    |  |                      |  |                        |  |                |  |       |  |         |  |         |  | year
      ended         
|                | Gross
      salary |  | Annual
      bonus |  | Other
      benefits |  | Total
      emoluments |  | 31
      March
|                |                    |  |                    |  |                      |  |                        |  |                |  |       |  |         |  |         |  |                           |  |      
|                | 2005               |  | 2004               |  | 2005                 |  | 2004                   |  | 2005           |  | 2004  |  | 2005    |  | 2004    |  | 2005                      |  | 2004 
|                | £000              |  | £000              |  | £000                |  | £000                  |  | £000          |  | £000 |  | £000   |  | £000   |  | £000                     |  | £000
|                |                    |  |                    |  |                      |  |                        |  |                |  |       |  |         |  |         |  |                           |  |      
|John Roberts    | 494.0              |  | 467.5              |  | 281.6                |  | 280.5                  |  | 38.4           |  | 35.6  |  | 814.0   |  | 783.6   |  | 200.8                     |  | 227.7
|                |                    |  |                    |  |                      |  |                        |  |                |  |       |  |         |  |         |  |                           |  |      
|Simon Batey     | 339.6              |  | 317.5              |  | 193.6                |  | 190.5                  |  | 18.6           |  | 18.0  |  | 551.8   |  | 526.0   |  | 163.3                     |  | 186.1
|                |                    |  |                    |  |                      |  |                        |  |                |  |       |  |         |  |         |  |                           |  |      
|Charlie Cornish | 243.7              |  | 42.3               |  | 138.9                |  | 25.4                   |  | 107.7          |  | 80.8  |  | 490.3   |  | 148.5   |  |                          |  |     
|                |                    |  |                    |  |                      |  |                        |  |                |  |       |  |         |  |         |  |                           |  |      
|Les Dawson      |                   |  |                   |  |                     |  |                       |  |               |  |      |  |        |  |        |  |                          |  | 118.0
|                |                    |  |                    |  |                      |  |                        |  |                |  |       |  |         |  |         |  |                           |  |      
|Gordon Waters   | 288.2              |  | 259.2              |  | 164.3                |  | 155.5                  |  | 13.3           |  | 26.7  |  | 465.8   |  | 441.4   |  | 114.9                     |  | 130.2
|                |                    |  |                    |  |                      |  |                        |  |                |  |       |  |         |  |         |  |                           |  |      
|Total           | 1,365.5            |  | 1,086.5            |  | 778.4                |  | 651.9                  |  | 178.0          |  | 161.1 |  | 2,321.9 |  | 1,899.5 |  | 479.0                     |  | 662.0
|                |                    |  |                    |  |                      |  |                        |  |                |  |       |  |         |  |         |  |                           |  |      

|Notes:
|------
|      
|•     
|      
|•     
|      
|•     
|      
|•     



|United Utilities
      Annual Report & Accounts 2005 | 39
|---------------------------------------------------- | --

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GovernanceDirectors remuneration report
  continued

A SalaryThe remuneration committee reviews salaries each year taking account of group and personal performance. Any changes are effective from 1 September. 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. Following its annual review in 2004, the following
  changes were made to the annual salaries of executive directors: Table 21: Executive
    directors salary review1 September
   
   1 September2004
   
   2003£000
   
   £000John Roberts
   504.0
   
   480.0Simon Batey
   346.5
   
   330.0Charlie Cornish
   250.0
   
   Gordon Waters
   294.0
   
   280.0 Note:
   Charlie
           Cornish was appointed to the board on 27 January 2004 at a yearly
    salary of £235,000. 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. The maximum award is 60 per cent of
yearly basic earnings. 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) 2005/06The remuneration committee has decided that for the 2005/06 annual bonus plan, financial measures will account for bonus payments worth up to 48 per cent of salary. The financial measures will be
group profit before exceptional items, interest and tax (PBEIT) and group profit before exceptional items and tax (PBET). Business managing directors will also have targets based on the PBEIT and PBET performance of their business. Financial measures have sliding scales of vesting. 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 fifth of the annual bonus, accounting
for 12 per cent of salary, will depend on performance in other areas of the groups
activities and the achievement of individual objectives. It has been  decided
to replace performance in the Business in the Environments (BiE) Index
with performance in the Business in the Communitys Corporate Responsibility
Index (CRI). The CRI is an authoritative and broader external benchmark of  responsible
business practice in relation to the environment and society. Achieving the target
of 94 per cent for the groups
score in the CRI will result in three per cent bonus being paid. A further three
per cent is allocated for achieving improvements in employee satisfaction measured
by responses to questions in an externally conducted and verified employee opinion
survey. Individual objectives account for a further six per cent bonus. The executive directors annual
bonus plan for 2005/06 is summarised in table 22.


|                                                                              |                    |                     |                    |                              |                                     |                          |                     |  |                                         |  |         
|----------------------------------------------------------------------------- | ------------------ | ------------------- | ------------------ | ---------------------------- | ----------------------------------- | ------------------------ | ------------------- |  | --------------------------------------- |  | --------
|Table
            22: Executive directors annual bonus plan measures 2005/06 |                    |                     |                    |                              |                                     |                          |                     |  |                                         |  |         
|                                                                              |                    |                     |                    |                              | Financial
            maximum award |                          |                     |  | Non-financial
            maximum award |  |         
|                                                                              |                    |                     |                    |                              |                                     |                          |                     |  |                                         |  |         
|                                                                              | Group              |                     | Group              |                              | Business                            |                          | Business            |  | Corporate                               |  | Employee
|PBEIT
            %                                                           | PBET
            % | PBEIT
            % | PBET
            % | responsibility
            % | satisfaction
            %          | objectives
            % | Total
            %
|                                                                              |                    |                     |                    |                              |                                     |                          |                     |  |                                         |  |         
|John Roberts                                                                  | 24                 |                     | 24                 |                              |                                    |                          |                    |  | 3                                       |  | 3       
|                                                                              |                    |                     |                    |                              |                                     |                          |                     |  |                                         |  |         
|Simon Batey                                                                   | 24                 |                     | 24                 |                              |                                    |                          |                    |  | 3                                       |  | 3       
|                                                                              |                    |                     |                    |                              |                                     |                          |                     |  |                                         |  |         
|Charlie Cornish                                                               | 18                 |                     | 18                 |                              | 6                                   |                          | 6                   |  | 3                                       |  | 3       
|                                                                              |                    |                     |                    |                              |                                     |                          |                     |  |                                         |  |         
|Tom Drury                                                                     | 18                 |                     | 18                 |                              | 6                                   |                          | 6                   |  | 3                                       |  | 3       
|                                                                              |                    |                     |                    |                              |                                     |                          |                     |  |                                         |  |         
|Gordon Waters                                                                 | 18                 |                     | 18                 |                              | 6                                   |                          | 6                   |  | 3                                       |  | 3       
|                                                                              |                    |                     |                    |                              |                                     |                          |                     |  |                                         |  |         
|                                                                              |                    |                     |                    |                              |                                     |                          |                     |  |                                         |  |         

|Note: |                                                                            
|----- | ---------------------------------------------------------------------------
|     | Figures are
            maximum awards
expressed as a percentage of salary.
|      |                                                                            

(b) 2004/05The financial measures to determine annual bonuses for 2004/05 were group PBEIT and PBET. The maximum bonus opportunity allocated to each of these targets was 24 per cent. 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 BiE index, three per cent on scores in the 2004/05 employee opinion survey and six per cent on the achievement of individual objectives. The stretch PBET and PBEIT targets were achieved. The total payable for performance against financial targets was, therefore, 48 per cent. The environmental target of 96 per cent was achieved
  (performance = 96.47 per cent). The employee-related targets (based on the results of the employee opinion survey) were not achieved. Each director achieved their individual objectives.




Therefore nine per cent bonus was payable bringing the overall bonus payable to a total of 57 per cent of salary. The outcome of the 2004/05 annual bonus plan for executive directors is shown in table 23.


|   |                                                   
|-- | --------------------------------------------------
|   |                                                   
|40 | United
    Utilities Annual Report & Accounts 2005

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Back to Contents

Table 23: Executive directors annual
  bonus plan outcome 2004/05

|                | Financial maximum award |             |              |            | Non-financial maximum award |  |          | 
|--------------- | ----------------------- | ----------- | ------------ | ---------- | --------------------------- |  | -------- | 
|                |                         |             |              |            |                             |  |          | 
|                | Group                   |             | Group        |            | Environmental               |  | Employee | 
|PBEIT           | PBET                    | performance | satisfaction | objectives | Total                      
|                |                         |             |              |            |                             |  |          | 
|Actual award:   | 24%                     |             | 24%          |            | 3%                          |  | 3%       | 
|                |                         |             |              |            |                             |  |          | 
|John Roberts    | 24                      |             | 24           |            | 3                           |  |         | 
|                |                         |             |              |            |                             |  |          | 
|Simon Batey     | 24                      |             | 24           |            | 3                           |  |         | 
|                |                         |             |              |            |                             |  |          | 
|Charlie Cornish | 24                      |             | 24           |            | 3                           |  |         | 
|                |                         |             |              |            |                             |  |          | 
|Gordon Waters   | 24                      |             | 24           |            | 3                           |  |         | 
|                |                         |             |              |            |                             |  |          | 

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

(c) Prior year annual bonuses paid in deferred sharesHalf of the
    value of the 2000/01 annual bonus awards for executive directors was satisfied
    by the grant in June 2001
    of contingent rights to receive shares in the company to be purchased in the
    market by the companys employee share trust. The right to these shares may have been forfeited in certain circumstances if an executive was not in the companys
    employment when the shares were due to be transferred to him from the trust in
    June 2004.




The company did not match the number of deferred shares and there were no additional performance measures associated with the release of these shares. The shares were released in June 2004 as shown
  in table 24.


|                                                                                                                       |                  
|---------------------------------------------------------------------------------------------------------------------- | -----------------
|Table
              24: Executive directors contingent interests in deferred
    shares relating to past bonus awards |                  
|                                                                                                                       |                  
|                                                                                                                       |                  
|in respect                                                                                                             | in shares at date
|of                                                                                                                     | of award         
|                                                                                                                       |                  
|                                                                                                                       |                  
|No.                                                                                                                    | £000            
|                                                                                                                       |                  
|John Roberts                                                                                                           |                  
|                                                                                                                       |                  
|Simon Batey                                                                                                            |                  
|                                                                                                                       |                  
|Gordon Waters                                                                                                          |                  
|                                                                                                                       |                  

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

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 where business use warrants it), are reimbursed fuel for business and private
  use and are provided with medical and life insurance. Charlie Cornish is paid a non-pensionable salary supplement of £18,500
  a year to compensate him for the reduction in employer contribution rate to his
  pension scheme relative to his
  previous employment. D Long-term incentivesExecutive directors
  and other senior executives participate in the performance share plan. Participation
  is 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 ten 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 retesting
  if the performance criteria are not met. To date the performance criteria have
  been (a) the companys total shareholder return (TSR) performance when compared
  with the TSR performance of a group of other companies and (b) 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 determines
  the composition of the comparator group when awards are granted each year. It
  has the discretion to make subsequent adjustments to


|                                                   |   
|-------------------------------------------------- | --
|United
    Utilities Annual Report & Accounts 2005 | 41

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GovernanceDirectors remuneration report
  continued

the group or the period over which relative TSR is measured during the performance period, for example, following a takeover bid or merger/demerger announcement, to maintain the integrity of the
  plan. During the year, the remuneration committee considered the treatment of changes affecting companies in the comparator groups for awards made in 2002/03 and 2003/04. These are reported below. 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. 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 will
  be adopting principles in due course to deal with 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 is terminated 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. 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 periodically buys 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 1 June 2005 are given on page 35. (a) 2005/06 grantThe proposed 2005/06 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 that the TSR
  comparator group will comprise 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. The performance period will be 1 April 2005 to 31 March 2008. 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 is set out in table 25. Table
    25: 2005/06 grant proposed vesting scale2005-06 planComparator group size(No. of companies)
   
   
   
   17% of maxRanking
   award vesting
   % of salary1 to 4
   
   100
   
   805
   
   93
   
   74.46
   
   78
   
   62.47
   
   63
   
   50.48
   
   48
   
   38.49
   
   33
   
   26.410 or below
   
   0
   
   0 (b) 2004/05 grantDuring the year
awards 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. There have been no changes during the year. 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. (c) 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. During 2004/05, British Energy delisted. It has been retained in the comparator group and United Utilities TSR performance relative to it will be 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. (d) 2002/03 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 2002 to 31 March 2005. At the beginning of
the performance period the comparator group comprised 18 companies in addition to United Utilities. Lattice Group was subsequently excluded from the group following its merger with National Grid Group. During 2004/05, British Energy delisted. It has
been retained in the comparator group and United Utilities TSR performance
relative to it will be compared from the beginning of the performance period
until the delisting. Details of directors continuing
scheme interests in the performance share plan, including those awarded during
the year, are set out in table 26.


|42 | United
    Utilities Annual Report & Accounts 2005
|-- | --------------------------------------------------

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Table 26: Executive directors continuing scheme interests in the performance share plan

|                |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  | Contingent          |  | Contingent             |  | Contingent        | 
|--------------- | -------- | ---------------- | ----------------------- |  | ---------------- |  | -------------- |  | ------------------- |  | ------------------ |  | --------------------- |  | ------------------- |  | ---------------------- |  | ----------------- | 
|                |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  | scheme              |  | scheme                 |  | scheme            | 
|                |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  | interest
      at   |  | interest
      awarded |  | interest
      at | 
|                |          |                  |                         |  |                  |  |                |  | Award
      details |  | 1
      April 2004 |  | during
      the year |  | 31
      March 2005 | 
|                |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  |                     | 
|                |          |                  |                         |  |                  |  | Maximum        |  | Market              |  |                    |  |                       |  |                     |  |                        |  |                   | 
|                |          |                  |                         |  |                  |  | value
      at |  | price
      of      |  |                    |  |                       |  |                     |  |                        |  |                   | 
|                |          |                  |                         |  | award
      date |  | a share        |  | Max                 |  | Max                |  | Max                   |  | Max                 |  | Max                    |  | Max               | 
|                |          |                  | Performance             |  |                  |  | at award       |  | no. of              |  | no. of             |  | value                 |  | no. of              |  | value                  |  | no. of            | 
|                |          | Award
      date | period                  |  | % of salary      |  | £000          |  | pence               |  | shares             |  | shares                |  | £000               |  | shares                 |  | £000             | 
|                |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  |                     |  |                        |  |                   | 
|John Roberts    |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  |                     |  |                        |  |                   | 
|                |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  |                     |  |                        |  |                   | 
|2002/03         |          | 1.10.02          | 1.4.02
      to 31.3.05 |  | 80               |  | 360.0          |  | 587.5               |  | 61,276             |  | 70,872                |  | 369.6               |  |                       |  |                  | 
|                |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  |                     |  |                        |  |                   | 
|2003/04         | Ordinary | 29.9.03          | 1.4.03
      to 31.3.06 |  | 80               |  | 360.0          |  | 469.0               |  | 57,843             |  | 57,843                |  | 301.7               |  |                       |  |                  | 
|                | A shares |                  |                         |  |                  |  |                |  | 276.0               |  | 32,135             |  | 32,135                |  | 103.6               |  |                       |  |                  | 
|                |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  |                     |  |                        |  |                   | 
|2004/05         | Ordinary | 18.8.04          | 1.4.04
      to 31.3.07 |  | 80               |  | 384.0          |  | 527.0               |  | 51,885             |  |                      |  |                    |  | 51,885                 |  | 283.8             | 
|                | A shares |                  |                         |  |                  |  |                |  | 341.25              |  | 28,825             |  |                      |  |                    |  | 28,825                 |  | 100.2             | 
|                |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  |                     |  |                        |  |                   | 
|Total           |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  | 774.9               |  |                        |  | 384.0             | 
|                |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  |                     |  |                        |  |                   | 
|Simon Batey     |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  |                     |  |                        |  |                   | 
|                |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  |                     |  |                        |  |                   | 
|2002/03         |          | 1.10.02          | 1.4.02
      to 31.3.05 |  | 80               |  | 240.0          |  | 587.5               |  | 40,851             |  | 47,248                |  | 246.4               |  |                       |  |                  | 
|                |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  |                     |  |                        |  |                   | 
|2003/04         | Ordinary | 29.9.03          | 1.4.03
      to 31.3.06 |  | 80               |  | 240.0          |  | 469.0               |  | 38,556             |  | 38,556                |  | 201.1               |  |                       |  |                  | 
|                | A shares |                  |                         |  |                  |  |                |  | 276.0               |  | 21,420             |  | 21,420                |  | 69.0                |  |                       |  |                  | 
|                |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  |                     |  |                        |  |                   | 
|2004/05         | Ordinary | 30.6.04          | 1.4.04
      to 31.3.07 |  | 80               |  | 264.0          |  | 547.0               |  | 35,658             |  |                      |  |                    |  | 35,658                 |  | 195.1             | 
|                | A shares |                  |                         |  |                  |  |                |  | 347.75              |  | 19,810             |  |                      |  |                    |  | 19,810                 |  | 68.9              | 
|                |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  |                     |  |                        |  |                   | 
|Total           |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  | 516.5               |  |                        |  | 264.0             | 
|                |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  |                     |  |                        |  |                   | 
|Charlie Cornish |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  |                     |  |                        |  |                   | 
|                |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  |                     |  |                        |  |                   | 
|2003/04         | Ordinary | 7.1.04           | 1.4.03
      to 31.3.06 |  | 80               |  | 188.0          |  | 490.0               |  | 28,710             |  | 28,710                |  | 149.7               |  |                       |  |                  | 
|                | A shares |                  |                         |  |                  |  |                |  | 297.0               |  | 15,950             |  | 15,950                |  | 51.4                |  |                       |  |                  | 
|                |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  |                     |  |                        |  |                   | 
|2004/05         | Ordinary | 30.6.04          | 1.4.04
      to 31.3.07 |  | 80               |  | 188.0          |  | 547.0               |  | 25,407             |  |                      |  |                    |  | 25,407                 |  | 139.0             | 
|                | A shares |                  |                         |  |                  |  |                |  | 347.75              |  | 14,115             |  |                      |  |                    |  | 14,115                 |  | 49.0              | 
|                |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  |                     |  |                        |  |                   | 
|Total           |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  | 201.1               |  |                        |  | 188.0             | 
|                |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  |                     |  |                        |  |                   | 
|Gordon Waters   |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  |                     |  |                        |  |                   | 
|                |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  |                     |  |                        |  |                   | 
|2002/03         |          | 1.10.02          | 1.4.02
      to 31.3.05 |  | 80               |  | 184.0          |  | 587.5               |  | 31,319             |  | 36,224                |  | 188.9               |  |                       |  |                  | 
|                |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  |                     |  |                        |  |                   | 
|2003/04         | Ordinary | 29.9.03          | 1.4.03
      to 31.3.06 |  | 80               |  | 184.0          |  | 469.0               |  | 29,565             |  | 29,565                |  | 154.2               |  |                       |  |                  | 
|                | A shares |                  |                         |  |                  |  |                |  | 276.0               |  | 16,425             |  | 16,425                |  | 52.9                |  |                       |  |                  | 
|                |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  |                     |  |                        |  |                   | 
|2004/05         | Ordinary | 30.6.04          | 1.4.04
      to 31.3.07 |  | 80               |  | 224.0          |  | 547.0               |  | 30,258             |  |                      |  |                    |  | 30,258                 |  | 165.5             | 
|                | A shares |                  |                         |  |                  |  |                |  | 347.75              |  | 16,810             |  |                      |  |                    |  | 16,810                 |  | 58.5              | 
|                |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  |                     |  |                        |  |                   | 
|Total           |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  | 396.0               |  |                        |  | 224.0             | 
|                |          |                  |                         |  |                  |  |                |  |                     |  |                    |  |                       |  |                     |  |                        |  |                   | 

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



|United
      Utilities Annual Report & Accounts 2005 | 43
|---------------------------------------------------- | --

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Back to Contents

GovernanceDirectors remuneration
  report continued

Table 27: Performance share
  plan vesting scales

|                                  |                     |  | 2002/03
      plan |  |                     |  | 2003/04
      plan |  |                     |  | 2004/05
      plan | 
|--------------------------------- | ------------------- |  | ------------------ |  | ------------------- |  | ------------------ |  | ------------------- |  | ------------------ | 
|                                  |                     |  |                    |  |                     | 
|Comparator group size             |                     |  |                    |  |                     |  |                    |  |                     |  |                    | 
|(No. of companies)                |                     |  | 18                 |  |                     |  | 16                 |  |                     |  | 18                 | 
|                                  |                     |  |                    |  |                     |  |                    |  |                     |  |                    | 
|                                  | % of max            |  |                    |  | % of max            |  |                    |  | % of max            |  |                    | 
|Ranking in comparator
      group | award
      vesting |  | % of salary        |  | award
      vesting |  | % of salary        |  | award
      vesting |  | % of salary        | 
|                                  |                     |  |                    |  |                     |  |                    |  |                     |  |                    | 
|1 to 4                            | 100                 |  | 80                 |  | 100                 |  | 80                 |  | 100                 |  | 80                 | 
|                                  |                     |  |                    |  |                     |  |                    |  |                     |  |                    | 
|5                                 | 97                  |  | 77.6               |  | 88                  |  | 70.4               |  | 97                  |  | 77.6               | 
|                                  |                     |  |                    |  |                     |  |                    |  |                     |  |                    | 
|6                                 | 82                  |  | 65.6               |  | 72                  |  | 57.6               |  | 82                  |  | 65.6               | 
|                                  |                     |  |                    |  |                     |  |                    |  |                     |  |                    | 
|7                                 | 68                  |  | 54.4               |  | 57                  |  | 45.6               |  | 68                  |  | 54.4               | 
|                                  |                     |  |                    |  |                     |  |                    |  |                     |  |                    | 
|8                                 | 54                  |  | 43.2               |  | 41                  |  | 32.8               |  | 54                  |  | 43.2               | 
|                                  |                     |  |                    |  |                     |  |                    |  |                     |  |                    | 
|9                                 | 40                  |  | 32                 |  | 0                   |  | 0                  |  | 40                  |  | 32                 | 
|                                  |                     |  |                    |  |                     |  |                    |  |                     |  |                    | 
|10 or below                       | 0                   |  | 0                  |  | 0                   |  | 0                  |  | 0                   |  | 0                  | 
|                                  |                     |  |                    |  |                     |  |                    |  |                     |  |                    | 

Table 28: Performance share
  plan TSR performance

|                      |                    |  | 2002/03
      plan     |  |           |  | 2003/04
      plan     |  | 2004/05
      plan     | 
|--------------------- | ------------------ |  | ---------------------- |  | --------- |  | ---------------------- |  | ---------------------- | 
|                      |                    |  |                        |  |           | 
|Performance period    |                    |  | 1.4.02
       31.3.05 |  |           |  | 1.4.03
       31.3.06 |  | 1.4.04
       31.3.07 | 
|                      |                    |  |                        |  |           |  |                        |  |                        | 
|Comparator group size |                    |  |                        |  |           |  |                        |  |                        | 
|(No. of companies)    |                    |  |                        |  | 18        |  |                        |  |                        | 
|                      |                    |  |                        |  |           |  |                        |  |                        | 
|Date                  | Period
      TSR % |  | Ranking                |  | % vesting |  | Period
      TSR %     |  | Ranking                | 
|                      |                    |  |                        |  |           |  |                        |  |                        | 
|31.3.05               | 39.9               |  | 5                      |  | 97        |  | 30.4                   |  | 8                      | 
|                      |                    |  |                        |  |           |  |                        |  |                        | 

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



Table 27 above sets out
    the vesting scales for each of the performance share plans in operation at
    31 March 2005. The TSR performance at
    31 March 2005 for each of the current plans is set out in table 28. The performance
    periods for the 2003/04 and 2004/05 plans do not end until 31 March 2006 and
    31 March 2007 respectively. (e) 2001/02 grantDuring
    the year, awards granted under the 2001/02 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 2001 to 31 March
    2004. At the beginning of the performance period the comparator group comprised
    the following 24 companies in addition to United Utilities: AWG, BAA, BG Group,
    Boots Company, British Energy, Capita Group, Centrica, Daily Mail & General
    Trust, Dixons Group, Imperial Tobacco Group, International Power, J Sainsbury,
    Kelda Group, Lattice Group, National Grid Group, Powergen, Railtrack, Safeway,
    Scottish & Newcastle, Scottish & Southern Energy, Scottish Power,
    Severn Trent, Viridian and Whitbread. Powergen was subsequently excluded from
    the comparator group as a result of the takeover bid announcement occurring
    within the first three months of the performance period. The announcements
    of the merger of National Grid Group and Lattice Group, the takeover bid for
    Safeway, takeover activity for AWG and the suspension of dealings in Railtrack
    shares occurred after the first three months of the performance period. All
    were retained in the comparator group. National Grid Group continued as National
    Grid Transco. United Utilities TSR performance relative to the other
    companies was compared from the beginning of the performance period until
    the day before the merger (Lattice Group) or takeover activity announcements
    (Safeway and AWG) and the date of Railtracks share suspension.




United Utilities
  TSR for the performance period was 15.5 per cent which placed it eighth out
  of 24, resulting in 81 per cent of the maximum award vesting and 19 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 2003/04 set out in the groups five-year business plan to 2005/06.
  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 29.




|44 | United Utilities Annual
      Report & Accounts 2005
|-- | ----------------------------------------------------

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Table 29: Executive directors
  scheme interests in the performance share plan vested during the year

|              |        |                         |        |  |                |  |                     |  |                       |  |                       |  |                |  | Contingent            |  |            |  |                |  |                  |  |       | 
|------------- | ------ | ----------------------- | ------ |  | -------------- |  | ------------------- |  | --------------------- |  | --------------------- |  | -------------- |  | --------------------- |  | ---------- |  | -------------- |  | ---------------- |  | ----- | 
|              |        |                         |        |  |                |  |                     |  |                       |  |                       |  |                |  | scheme                |  |            |  |                |  |                  |  |       | 
|              |        |                         |        |  |                |  |                     |  |                       |  |                       |  |                |  | interest              |  | Contingent |  |                |  |                  | 
|              |        |                         |        |  |                |  |                     |  |                       |  | Contingent            |  | lapsed         |  | scheme
      vested   |  |            |  | Value
      of | 
|              |        |                         |        |  |                |  |                     |  |                       |  | scheme
      interest |  | during         |  | interest
      during |  |            |  | award
      at | 
|              |        |                         |        |  |                |  | Award
      details |  | at
      1 April 2004 |  | the year              |  | the
      year |  |                       |  | exercise   | 
|              |        |                         |        |  |                |  |                     |  |                       |  |                       |  |                |  |                       |  |            | 
|              |        |                         |        |  | Maximum        |  | Market              |  |                       |  |                       |  |                |  |                       |  |            |  |                |  | Market           |  |       | 
|              |        |                         |        |  | value
      at |  | price
      of      |  |                       |  |                       |  |                |  |                       |  |            |  |                |  | price
      of a |  |       | 
|              |        |                         |        |  | award          |  | a share             |  | Max.                  |  | Max.                  |  | Max.           |  |                       |  |            |  |                |  | share
      at   |  |       | 
|              | Award  | Performance             | % of   |  | date           |  | at award            |  | no. of                |  | no. of                |  | value          |  | No. of                |  | No. of     |  | Value          |  | exercise         |  | Value | 
|              | date   | period                  | salary |  | £000          |  | pence               |  | shares                |  | shares                |  | £000          |  | shares                |  | shares     |  | £000          |  | pence            |  | £000 | 
|              |        |                         |        |  |                |  |                     |  |                       |  |                       |  |                |  |                       |  |            |  |                |  |                  |  |       | 
|John Roberts  |        |                         |        |  |                |  |                     |  |                       |  |                       |  |                |  |                       |  |            |  |                |  |                  | 
|              |        |                         |        |  |                |  |                     |  |                       |  |                       |  |                |  |                       |  |            |  |                |  |                  |  |       | 
|2001/02       | 9.7.01 | 1.4.01
      to 31.3.04 | 80     |  | 256.0          |  | 652.0               |  | 39,263                |  | 45,412                |  | 236.8          |  | 8,629                 |  | 36,783     |  | 199.5          |  | 546.0            |  | 200.8 | 
|              |        |                         |        |  |                |  |                     |  |                       |  |                       |  |                |  |                       |  |            |  |                |  |                  |  |       | 
|Simon Batey   |        |                         |        |  |                |  |                     |  |                       |  |                       |  |                |  |                       |  |            |  |                |  |                  |  |      
|              |        |                         |        |  |                |  |                     |  |                       |  |                       |  |                |  |                       |  |            |  |                |  |                  |  |       | 
|2001/02       | 9.7.01 | 1.4.01
      to 31.3.04 | 80     |  | 208.0          |  | 652.0               |  | 31,901                |  | 36,897                |  | 192.4          |  | 7,011                 |  | 29,886     |  | 162.1          |  | 546.5            |  | 163.3 | 
|              |        |                         |        |  |                |  |                     |  |                       |  |                       |  |                |  |                       |  |            |  |                |  |                  |  |       | 
|Gordon Waters |        |                         |        |  |                |  |                     |  |                       |  |                       |  |                |  |                       |  |            |  |                |  |                  |  |      
|              |        |                         |        |  |                |  |                     |  |                       |  |                       |  |                |  |                       |  |            |  |                |  |                  |  |       | 
|2001/02       | 9.7.01 | 1.4.01
      to 31.3.04 | 80     |  | 146.4          |  | 652.0               |  | 22,453                |  | 25,970                |  | 135.4          |  | 4,935                 |  | 21,035     |  | 114.1          |  | 546.0            |  | 114.9 | 
|              |        |                         |        |  |                |  |                     |  |                       |  |                       |  |                |  |                       |  |            |  |                |  |                  |  |       | 

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



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 2000.




|United
      Utilities Annual Report & Accounts 2005 | 45
|---------------------------------------------------- | --

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GovernanceDirectors remuneration
  report continued

Share optionsGrants of
  executive share options were made under the company share option plan 1999 up
  to and including 2002, except for executive directors and a limited number of
  other executives who were granted awards under the performance share plan. There
  has been no grant of executive share options since 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 are shown in
  Table 30.

|               |            | Granted/(lapsed) | Exercised |                   | Exercise
      price |                  |            
|-------------- | ---------- | ---------------- | --------- | ----------------- | -------------------- | ---------------- | -----------
|               | At 1 April | during           | during    | At 31
      March | per share            | First
      date | Last date  
|               | 2004       | the year         | the year  | 2005              | pence                | exercisable      | exercisable
|               |            |                  |           |                   |                      |                  |            
|John Roberts   |            |                  |           |                   |                      |                  |            
|               |            |                  |           |                   |                      |                  |            
|Sharesave 2000 | 4,139      |                 | 4,139     |                  | 407.66p              | 01.03.2005       | 31.08.2005 
|               |            |                  |           |                   |                      |                  |            
|Total          | 4,139      |                 | 4,139     |                  |                      |                  |            
|               |            |                  |           |                   |                      |                  |            
|Simon Batey    |            |                  |           |                   |                      |                  |            
|Sharesave 2001 | 2,012      |                 | 2,012     |                  | 481.16p              | 01.03.2004       | 31.08.2004 
|               |            |                  |           |                   |                      |                  |            
|Sharesave 2004 | 1,751      |                 |          | 1,751             | 396.0p               | 01.03.2007       | 31.08.2007 
|               |            |                  |           |                   |                      |                  |            
|Total          | 3,763      |                 | 2,012     | 1,751             |                      |                  |            
|               |            |                  |           |                   |                      |                  |            
|Gordon Waters  |            |                  |           |                   |                      |                  |            
|               |            |                  |           |                   |                      |                  |            
|Sharesave 2002 | 2,648      |                 |          | 2,648             | 432.3p               | 01.03.2007       | 31.08.2007 
|               |            |                  |           |                   |                      |                  |            
|Sharesave 2003 | 382        |                 |          | 382               | 423.66p              | 01.03.2006       | 31.08.2006 
|               |            |                  |           |                   |                      |                  |            
|Total          | 3,030      |                 |          | 3,030             |                      |                  |            
|               |            |                  |           |                   |                      |                  |            

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

Executive directors
  shareholdingsExecutive
  directors are required to build up and retain a target shareholding equal to
  1x yearly 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.
  However, it has retained the option to pay the annual bonus in shares if it
  considers this to be appropriate. Executive directors interests in shares,
  as at 31 March 2005, are listed in tables 12, 13 and 14 of the directors
  report on pages 35 and 36. The value of these interests relative to their yearly
  salaries are shown in table 31 below.

|                |                  |                 | Value of      |                       
|--------------- | ---------------- | --------------- | ------------- | ----------------------
|                |                  | Value of        | shareholding  |                       
|                | Yearly salary at | shareholding at | relative to   |                       
|                | 31 March 2005    | 31 March 2005   | yearly salary | Target to be          
|                | £000            | £000           | %             | achieved by           
|                |                  |                 |               |                       
|John Roberts    | 504.0            | 876.5           | 173.9         | 1
      September 2004
|                |                  |                 |               |                       
|Simon Batey     | 346.5            | 718.8           | 207.4         | 1 April
      2005    
|                |                  |                 |               |                       
|Charlie Cornish | 250.0            | 0.3             | 0.1           | 27 January
      2009 
|                |                  |                 |               |                       
|Gordon Waters   | 294.0            | 312.2           | 106.2         | 1 June
      2002     
|                |                  |                 |               |                       

|Note:
|-----
|    



|46 | United Utilities Annual
      Report & Accounts 2005
|-- | ----------------------------------------------------

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Pension arrangementsThe main
    pension scheme is the United Utilities Pension Scheme (UUPS). It provides
    pensions and other benefits to members within Inland Revenue limits. The remuneration committee
    recognises that pension is an important but potentially costly element of
    remuneration. Decisions have previously been made to close the defined benefit
    section of the scheme to newly recruited directors and other senior executives
    from 1 July 2003, and to stop entry to the defined benefit executive section
    (which provides enhanced benefits) for existing scheme members with effect
    from 1 April 2004. It was further agreed not to extend the use of unfunded
    arrangements to provide pension benefits above the Inland Revenue limits imposed
    on the pension scheme. Newly recruited executive
    directors may join the defined contribution section of the scheme. They may
    make a regular contribution of up to seven per cent of basic pay and additional
    voluntary contributions provided total contributions do not exceed the Inland
    Revenues maximum i.e. 15 per cent of the earnings cap. The company contributes
    at twice the members regular contribution rate, the maximum being 14
    per cent of basic pay (but not limited by the earnings cap). The normal pension
    age is 65. Charlie Cornish is a member of this section. He pays seven per
    cent of his pensionable pay subject to a maximum yearly contribution of 15
    per cent of the earnings cap. The accrual of his pension benefits is currently
    limited by the earnings cap. John Roberts, Simon Batey,
    Tom Drury and Gordon Waters are members of the defined benefit section. It
    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. John Roberts and
    Simon Batey contribute five per cent and Tom Drury and Gordon Waters six per
    cent of their pensionable pay to the pension scheme subject to a maximum yearly
    contribution of 15 per cent of the earnings cap. The Finance Act 1989 restricts
    the pension benefits that can be paid by the scheme as the earnings cap limits
    pensionable earnings for calculating benefits. Arising from previous policy,
    the company has put in place separate arrangements for John Roberts, Simon
    Batey, Tom Drury and Gordon Waters (and a limited number of other senior executives),
    the effect of which is to provide pension benefits calculated on the same
    basis as for executives whose pensionable earnings are not limited by the
    cap. These arrangements are unfunded. At 31 March 2005, there were 26 such
    arrangements in place. Ten related to current executives, five




to deferred pensioners
    and 11 to pension benefits in payment. Further information on payments made
    during the year and the total cost of the unfunded arrangements is given in
    note 26 to the accounts. During the financial year
    2005, the total amounts set aside or accrued by the company or its subsidiaries
    to provide pension, retirement or similar benefits for all directors and members
    of the executive leadership team as a group was £1,804,042. Non-executive
    directors do not participate in any of the companys pension schemes. 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 offset partially 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. The pension benefits earned
    by directors during the year are shown in table 32. During the year, the remuneration
    committee considered the potential impact of legislative changes on pensions
    policy. From April 2006, current Inland Revenue limits will cease to apply
    to benefits provided by the pension scheme under either the defined benefit
    or defined contribution sections. The trustees of the companys various
    pension schemes will be examining the rule changes necessary to ensure the
    schemes qualify as registered pension schemes under the new regime. It is
    expected that there will be no change to the existing UUPS benefit limit of
    two-thirds of pensionable pay for members of the defined benefit section.
    If a members accrued fund exceeds the new lifetime allowance, the benefits
    payable by the scheme from that excess will be subject to a higher rate of
    income tax. There will be no arrangements to compensate members for any change
    in their personal tax liability. Executives with unfunded
    arrangements are all members of the defined benefit section of UUPS. They
    will be given three months from the date the legislative changes take effect
    to decide whether to transfer the value of their unfunded benefit into the
    registered pension scheme. They may also choose whether all future fund accrual
    should be within the registered scheme or whether any benefit in excess of
    those generated within the lifetime allowance should accrue under the unfunded
    arrangement. There will be no arrangements to compensate for any change in
    personal tax liability on benefits payable by the registered pension scheme
    from any excess over the lifetime allowance. The committee will further consider pension policy over the next year, particularly in relation to alternative arrangements to pension accrual.




Table 32: Executive directors
  pension benefits (defined benefit scheme)

|              |                                 |                      |                     | Increase
      in accrued pension during the year |                                 |                      |                               
|------------- | ------------------------------- | -------------------- | ------------------- | ------------------------------------------------- | ------------------------------- | -------------------- | ------------------------------
|              | Accumulated
      total accrued |                      |                     |                                                   | Accumulated
      total accrued
|              | pension
      at 1 April 2004   |                      |                     | Transfer
      value                              | Total
      change              |                      | pension
      at 31 March 2005
|              |                                 |                      |                     | 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  | 71.4                            | 1,219.9              | 18.0                | 15.3                                              | 314.5                           | 447.2                |                               
|              |                                 |                      |                     |                                                   |                                 |                      |                               
|Simon Batey   | 42.3                            | 526.6                | 12.8                | 15.3                                              | 161.3                           | 239.6                |                               
|              |                                 |                      |                     |                                                   |                                 |                      |                               
|Gordon Waters | 88.6                            | 1,464.0              | 19.5                | 15.3                                              | 331.0                           | 498.5                |                               
|              |                                 |                      |                     |                                                   |                                 |                      |                               
|Notes:        |                                 |                      |                     |                                                   |                                 |                      |                               

| | Pension accruals shown are the amounts that would be paid annually on retirement based on service to the end of the year, or date of leaving employment or retirement if
earlier.                                                                                                                                                                                                     
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Transfer values have been calculated in accordance with version 8.1 of guidance note GN11 issued by the actuarial profession.                                                                                                                                                                                                                                                         
| | The transfer value of the net increase in pension (2) represents the incremental value to the director of his service during the year, calculated on the assumption that service
terminated at the year end, or at date of leaving employment or retirement if earlier. It is based on the accrued pension increase (1) and is calculated after deducting the directors contribution.
| | The change in the transfer value (3) includes the effect of fluctuations in the transfer value due to factors beyond the control of the company and directors, such as stock market
movements. It is calculated after deducting the directors contribution.                                                                                                                          
| | Voluntary contributions paid by directors and resulting benefits are not shown.                                                                                                                                                                                                                                                                                                       
| | The transfer value represents a liability of the company to make pension payments in the future but not a sum paid to the individual.                                                                                                                                                                                                                                                 
| | During the year ended 31 March 2005, the company paid contributions for Charlie Cornish totalling £34,125 (2004  £7,187) to the defined contribution section of
the pension scheme.                                                                                                                                                                                                  



|United Utilities Annual
      Report & Accounts 2005 | 47
|---------------------------------------------------- | --

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Back to Contents

GovernanceDirectors remuneration
  report continued

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. All the current executive directors have one-year notice periods. Contracts terminate
        automatically  upon the director reaching age 60 (Charlie Cornish: 65)
        unless the company
    agrees that a director may continue to work after attaining age 60 (Charlie
         Cornish: 65). 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 a 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 and the amount of the
    compensation in each case. 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 33.




Table 33: Executive directors
  and senior managers service contracts

|                |                        | Unexpired
      term      |   |                           |  |                                                      
|--------------- | ---------------------- | ------------------------- | - | ------------------------- |  | -----------------------------------------------------
|                | Date of
      contract | (to 60th
      birthday) |   | Notice
      period       |  | Contractual
      compensation upon early termination
|               
|John Roberts    | 01.09.99               | 02.03.06                  |   | 12
      months (rolling) |  | No explicit provision                                
|                |                        |                           |   |                           |  | (other than payment
      for outstanding holidays)  
|               
|Simon Batey     | 01.04.00               | 04.09.13                  |   | 12 months
      (rolling) |  | No explicit provision                                
|                |                        |                           |   |                           |  | (other than payment
      for outstanding holidays)  
|               
|Gordon Waters   | 01.03.96               | 06.06.07                  |   | 12 months
      (rolling) |  | No explicit provision                                
|                |                        |                           |   |                           |  | (other than payment
      for outstanding holidays)  
|               
|Charlie Cornish | 05.01.04               | 30.11.24                  |  | 12 months
      (rolling) |  | No explicit provision                                
|                |                        |                           |   |                           |  | (other than payment
      for outstanding holidays)  
|               
|Tom Drury       | 09.05.05               | 14.09.21                  |   | 12 months
      (rolling) |  | No explicit provision                                
|                |                        |                           |   |                           |  | (other than payment
      for outstanding holidays)  
|               
|Linda Booth     | 01.01.03               | 09.10.12                  |   | 12 months
      (rolling) |  | No explicit provision                                
|                |                        |                           |   |                           |  | (other than payment
      for outstanding holidays)  
|               
|Hugh Logan      | 17.07.00               | 11.11.09                  |   | 12 months
      (rolling) |  | No explicit provision                                
|                |                        |                           |   |                           |  | (other than payment
      for outstanding holidays)  
|               
|Ian Priestner   | 16.10.00               | 20.05.17                  |   | 12 months
      (rolling) |  | No explicit provision                                
|                |                        |                           |   |                           |  | (other than payment
      for outstanding holidays)  
|               
|Tim Rayner      | 01.04.98               | 04.08.20                  |   | 12 months
      (rolling) |  | No explicit provision                                
|                |                        |                           |   |                           |  | (other than payment
      for outstanding holidays)  
|               

|Note:
|-----
|    

Approved by the board of
  directors on 1 June 2005 and signed on its behalf by

John SeedRemuneration
  committee chairman



|48 | United Utilities Annual
      Report & Accounts 2005
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Governance
Corporate governance report

The Combined CodeIn July 2003,
the Financial Reporting Council in the UK issued a revised Combined Code on Corporate
Governance which
superseded the Combined Code published in 1998 (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 37 to 48, 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 for social, environmental and ethical issues. Attendance by individual directors
  at meetings of the board and its committees during the year ended 31 March 2005
  is shown in table 34 and full biographical details of the directors can be found
  on pages 33 and 34. 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 52), remuneration (see page 38), nomination (see Appointments to the board on
page 50), 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, the managing director of Your
Communications 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, the chief executive, the group finance director and one of the other 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
  in respect of legal action against the directors. Chairman and chief executive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 chief executive.
        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 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. The directors have a wide and diverse range of business
        and other experience and expertise. The Combined 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 would satisfy the independence
criteria laid down by the Combined Code. Taking into account the provisions of the Combined 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


Table 34: Attendance by individual directors at meetings of the board and its committees

|                    | Board    |  | Audit  |  | Nomination |  | Remuneration | 
|------------------- | -------- |  | ------ |  | ---------- |  | ------------ | 
|                    |          |  |        |  |            |  |              | 
|                    | Possible |  | Actual |  | Possible   |  | Actual       | 
|                    |          |  |        |  |            |  |              | 
|John Roberts        | 17       |  | 16     |  | n/a        |  | n/a          | 
|                    |          |  |        |  |            |  |              | 
|Simon Batey         | 17       |  | 16     |  | n/a        |  | n/a          | 
|                    |          |  |        |  |            |  |              | 
|Charlie Cornish     | 17       |  | 16     |  | n/a        |  | n/a          | 
|                    |          |  |        |  |            |  |              | 
|Gordon Waters       | 17       |  | 14     |  | n/a        |  | n/a          | 
|                    |          |  |        |  |            |  |              | 
|Sir Richard Evans   | 17       |  | 17     |  | n/a        |  | n/a          | 
|                    |          |  |        |  |            |  |              | 
|Norman Broadhurst   | 17       |  | 13     |  | 7          |  | 7            | 
|                    |          |  |        |  |            |  |              | 
|David Jones         | 5        |  | 4      |  | 2          |  | 2            | 
|                    |          |  |        |  |            |  |              | 
|Sir Peter Middleton | 17       |  | 15     |  | 7          |  | 6            | 
|                    |          |  |        |  |            |  |              | 
|Jane Newell         | 17       |  | 15     |  | 7          |  | 7            | 
|                    |          |  |        |  |            |  |              | 
|Andrew Pinder       | 17       |  | 16     |  | 7          |  | 5            | 
|                    |          |  |        |  |            |  |              | 
|John Seed           | 17       |  | 16     |  | 7          |  | 7            | 
|                    |          |  |        |  |            |  |              | 



|United Utilities
    Annual Report & Accounts 2005 | 49
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Governance
Corporate governance report continued

years. Andrew Pinder remains independent, notwithstanding that he receives additional remuneration as a non-executive director of Vertex. 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 full terms
of reference for the senior independent director are available on the companys
web site 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 concern. 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. The 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.
  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. As such, the majority of the members of the committee
  are independent
  non-executive directors. The nomination committees terms of reference are
  available to shareholders on request and are also available on the companys
  web site. The committee met three times in the year to 31 March 2005. 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 re-election
by shareholders of any director under the retirement by rotation provisions in
the companys articles of association. During the year, the committee prepared
a description of the roles and capabilities required for the appointment of 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 David Jones and Nick Salmon as non-executive directors. The letters of appointment of non-executive
directors are made available on the company web site. 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. However, the board’s policy
is that no full time executive director should take on more than one non-executive
directorship of a FTSE 100 company or the chairmanship of such a company. John




Roberts is a non-executive director
of Volex Group plc, for which he earned and retained a fee of £26,000 during the year to 31 March 2005 and Simon Batey is a non-executive director of Arriva
plc, for which he earned and retained a fee of £32,458 during the year
to 31 March 2005. 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, 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 major shareholders the opportunity
to meet David Jones and Nick Salmon as new non-executive directors. 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. Both the
        appointment and removal of the company secretary are a matter 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. The
        questionnaire
  was modelled on the
  Chairmens Guide to the Board Performance Review published by the Chairmens
  Forum and was consistent with guidance published by the Chartered Institute of
  Secretaries and Administrators, and required each director 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,
group approvals, nomination, remuneration and treasury 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 auditor and the group audit manager each
completed confidential questionnaires about the audit committee. The company
  secretary analysed the completed board and committee questionnaires and summarised
  the findings in a report for the chairman, which highlighted and prioritised
  the key areas of feedback. The chairman subsequently conducted one to one discussions

with each of the board members based on the


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summary report, after which the chairman reported back to the whole board on the evaluation process and its key findings. The board developed a plan to make changes in a number of areas, including
updating skills, succession planning and creating more time for discussions on strategic issues, which either have already been implemented or will be implemented during the course of the current financial year. 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. Re-appointment 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, on 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 election at the next annual general
  meeting. The companys
  articles of association include provisions requiring one-third of all directors
  to retire and seek re-election at each annual general meeting, and ensuring
  that no director serves for more than three years without retiring and being
  proposed
  for re-election at an annual general meeting. Biographical details
        of directors being submitted for election or reelection are set out in
        the notes accompanying
    the relevant notice of meeting. Non-executive directors are appointed
for specified terms subject to re-election under the companys articles of association and subject to Companies Acts provisions relating to the
removal of a director. The board explains to shareholders in the papers accompanying a resolution to elect a non-executive director why they believe that non-executive director should be elected. The chairman will confirm to shareholders when
proposing re-election that, following formal performance evaluation, that individuals
performance continues to be effective and to demonstrate commitment to the role.
Any term beyond six years for a non-executive director will be subject to particularly
rigorous review, and will take into account the need for progressive refreshing
of the board. Any non-executive director serving longer than nine years will
be subject to annual re-election. 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. In particular, the board has recognised the fact that
  the UK government
  has
  introduced legislation concerning the contents of a companys operating
  and financial review which will take effect in 2006 and has endeavoured to
  conform with the Accounting Standards Boards statement of best practice
  concerning such reporting in advance of the requirements becoming mandatory. The
    considerable
    overlap between the new operating and financial review requirements and the
    format of the US Annual Report on Form 20-F has prompted the board to produce,
    for the
    first
    time, a single consolidated UK and US compliant Annual Report and 20-F which
    it hopes will provide a single source of information about the company. 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 2005/06, 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 2005, an evaluation
was carried out under the supervision and with the participation of senior management,
including the chief executive and group finance director, 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 upon and as of the date of the
companys evaluation, the chief executive and group finance director concluded
that the disclosure controls and procedures are effective to provide reasonable
assurance that information required to be disclosed in the reports the company
files and submits under UK and US legislation, is recorded, processed, summarised
and reported as and when required. 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 responsibilitiesIn accordance
with statutory requirements, the directors are responsible for preparing financial
statements for each financial
year which give a true and fair view of the companys and the
groups state of affairs as at the end of the financial year, and of the
profit or loss and cash flows for the financial year. The directors consider that, in preparing the financial statements, the group has used appropriate accounting policies, consistently applied and supported by reasonable and prudent judgements and
estimates. All applicable accounting standards have been followed, subject to any departure and explanation described in the notes to the consolidated financial statements. The directors have a legal responsibility
for ensuring that the company keeps accounting records which disclose, with reasonable
accuracy at any time, the companys and the groups
financial position and which enable them to ensure the financial statements comply with the Companies Act 1985. The directors also have a general legal responsibility for taking such steps as are reasonably open to them to safeguard the
companys and the groups assets and to prevent and detect fraud and other irregularities. The external auditors
statement about its reporting responsibilities is set out on page 55. 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,


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GovernanceCorporate governance report continued

and not absolute, assurance against material misstatement or loss. In addition, the board is
      making preparations for compliance with s404 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 key performance indicators 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;•
   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 in-depth;•
   a quarterly sustainable development panel chaired by the chief executive, and comprising the managing directors of United Utilities North West and United Utilities Contract
Solutions, the head of environment and the community and three external professional specialists, Walter Menzies, Clive Jeanes and Dr Mark Everard. 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;•
   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 auditor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-20F. The committee met seven times in the year to 31 March 2005. The committee has
        primary responsibility for making a recommendation on the appointment,
        reappointment and removal of the external auditor to the board, for it
        to put to shareholders for their approval in general meeting. It keeps
        under review the scope and results of the audit and its cost-effectiveness
        and the independence and
    objectivity of the auditor. The committee has established policies and procedures
        to pre-approve the provision of any audit or non-audit services and keeps
        the nature and extent of non-audit services under review. It reviews
        the half year and annual financial statements 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 terms of reference of the audit committee are available to shareholders on request and are also are
    available on the companys web site. The audit committee reviews, at least
annually, arrangements by which staff of the group may, in confidence, raise
concerns about possible improprieties in matters of financial reporting or other
matters. During the year, the board, on the recommendation of the audit committee,
adopted a revised disclosure policy and have implemented a confidential voice
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 audit committee keeps under review
the scope and results of the external audit, its cost effectiveness, the independence
and objectivity of the auditor and the nature and extent of non-audit services
supplied to the group by the external auditor, seeking to balance the maintenance
of objectivity and value for money. Audit and audit-related
        services are pre-approved annually by the audit committee. Audit-related
        services generally are
  highly correlated with the role of an independent auditor. 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 auditor provides 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 auditor, 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
        to 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 2004/05, all services were pre-approved by
        the audit committee and none was 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


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independent auditor. The fees paid or payable to the auditor in the year ender review are set out in table 35. Table 35: Fees to Deloitte & Touche LLP2005
   
   2004£000
   £000Audit fees
   590.0
   
   563.1Audit related fees (1)
   825.0
   
   882.0Tax fees (2)
   300.0
   
   335.0Total
   1,715.0
   
   1,780.1 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.(2)
   Tax fees are fees incurred for tax compliance, tax advice and related tax work.(3)
   In addition to the above, fees relating to joint ventures of the group were paid to Deloitte & Touche LLP in 2005 totalling £15,000 (2004 
£66,800). 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 116 different funds, representing 43 per cent of
        the companys issued ordinary 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 AGM 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 AGM to answer questions relevant to the work of those committees. All directors normally attend the AGM.




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, world-wide 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 2004/05 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 being deemed independent under NYSE rules) together with the non-executive chairman and the chief executive. 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
2004/05 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 at pages 37 to 48. The terms of reference of United Utilities audit, nomination and remuneration committees are available on
the companys web site. NYSE listing standards require US companies to adopt a code of


|                                               |   
|---------------------------------------------- | --
|United Utilities Annual Report & Accounts 2005 | 53

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GovernanceCorporate governance report continued

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, the group finance director and the group financial
controller which comply with the NYSE requirements. United Utilities Business
Principles are available on the companys web site. 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 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 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 will be
required to promptly notify the NYSE in writing if any executive officer becomes
aware of any material non-compliance with the NYSE corporate governance standards
applicable to
United Utilities.


|   |                                               
|-- | ----------------------------------------------
|54 | United Utilities Annual Report & Accounts 2005

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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 2005 and 2004, and the related consolidated profit and
        loss account and consolidated cash flow statements for each of the three
        years in the period ended 31 March 2005, as listed in the Item 17. 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 2005 and
        2004, and the results of its operations and its cash flows for each of
        the three years in the period ended 31 March 2005 in conformity with
        accounting principles generally accepted in the United Kingdom. Accounting principles generally
        accepted in the United Kingdom vary in certain significant respects from
        accounting principles generally accepted in the United States of America.
        The application of the latter would have affected the determination of
        net income for each of the three years in the period ended 31 March 2005
        and the determination of shareholders' equity and financial position
        at 31 March 2005 and 2004, to the extent summarised in Note 37 to the
        consolidated financial statements as listed in the accompanying index.
        The reported net income for the years ended 31 March 2005 ,2004 and 2003
        and consolidated shareholders' equity at 31 March 2005 and 2004 as determined
        in accordance with accounting principles generally accepted in the United
        States of America have been restated for the items described in note
        37. DELOITTE & TOUCHE LLP
  Manchester, United Kingdom1 June 2005 (9 December 2005 as to the effects of the restatement discussed
  in note 37)


|United Utilities
      Annual Report & Accounts 2005 | 55
|---------------------------------------------------- | --

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Financial statementsConsolidated profit
  and loss account

|                                                               |       |  | Before       |   | Goodwill    |   |          |   | Before       |   | Goodwill    |   |          |   | Before       |   | Goodwill    |   |          |  
|-------------------------------------------------------------- | ----- |  | ------------ | - | ----------- | - | -------- | - | ------------ | - | ----------- | - | -------- | - | ------------ | - | ----------- | - | -------- | -
|                                                               |       |  | goodwill and |   | and         |   |          |   | goodwill and |   | and         |   |          |   | goodwill and |   | and         |   |          |  
|                                                               |       |  | exceptional  |   | exceptional |   | 2005     |   | exceptional  |   | exceptional |   | 2004     |   | exceptional  |   | exceptional |   | 2003     |  
|                                                               |       |  | items        |   | items       |   | Total    |   | items        |   | items       |   | Total    |   | items        |   | items       |   | Total    |  
|For the year ended 31 March                                    | Note  |  | £m           |   | £m          |   | £m       |   | £m           |   | £m          |   | £m       |   | £m           |   | £m          |   | £m       |  
|                                                               |       |  |              |   |             |   |          |   |              |   |             |   |          |   |              |   |             |   |          |  
|Turnover: group and share of joint ventures                    | 2     |  | 2,368.2      |   |            |   | 2,368.2  |   | 2,115.5      |   |            |   | 2,115.5  |   | 1,920.5      |   |            |   | 1,920.5  |  
|                                                               |       |  |              |   |             |   |          |   |              |   |             |   |          |   |              |   |             |   |          |  
|Less: share of joint venture turnover                          | 2     |  | (114.3       | ) |            |   | (114.3   | ) | (55.5        | ) |            |   | (55.5    | ) | (41.7        | ) |            |   | (41.7    | )
|                                                               |       |  |              |   |             |   |          |   |              |   |             |   |          |   |              |   |             |   |          |  
|Group turnover                                                 |       |  | 2,253.9      |   |            |   | 2,253.9  |   | 2,060.0      |   |            |   | 2,060.0  |   | 1,878.8      |   |            |   | 1,878.8  |  
|                                                               |       |  |              |   |             |   |          |   |              |   |             |   |          |   |              |   |             |   |          |  
|Net operating costs                                            | 3     |  | (1,585.5     | ) | (45.2       | ) | (1,630.7 | ) | (1,477.2     | ) | (12.7       | ) | (1,489.9 | ) | (1,332.7     | ) | (36.1       | ) | (1,368.8 | )
|                                                               |       |  |              |   |             |   |          |   |              |   |             |   |          |   |              |   |             |   |          |  
|Group operating profit                                         |       |  | 668.4        |   | (45.2       | ) | 623.2    |   | 582.8        |   | (12.7       | ) | 570.1    |   | 546.1        |   | (36.1       | ) | 510.0    |  
|                                                               |       |  |              |   |             |   |          |   |              |   |             |   |          |   |              |   |             |   |          |  
|Share of operating profit of joint ventures                    | 2, 14 |  | 23.4         |   | (0.7        | ) | 22.7     |   | 14.3         |   | (0.7        | ) | 13.6     |   | 15.6         |   | (0.7        | ) | 14.9     |  
|                                                               |       |  |              |   |             |   |          |   |              |   |             |   |          |   |              |   |             |   |          |  
|Total operating profit                                         | 2     |  | 691.8        |   | (45.9       | ) | 645.9    |   | 597.1        |   | (13.4       | ) | 583.7    |   | 561.7        |   | (36.8       | ) | 524.9    |  
|                                                               |       |  |              |   |             |   |          |   |              |   |             |   |          |   |              |   |             |   |          |  
|Profit on sale or termination of operations                    | 4     |  |             |   | 4.5         |   | 4.5      |   |             |   | 4.3         |   | 4.3      |   |             |   | 34.0        |   | 34.0     |  
|                                                               |       |  |              |   |             |   |          |   |              |   |             |   |          |   |              |   |             |   |          |  
|Profit/(loss) on disposal of fixed assets                      | 4     |  |             |   | 4.1         |   | 4.1      |   |             |   | (2.4        | ) | (2.4     | ) |             |   |            |   |         |  
|                                                               |       |  |              |   |             |   |          |   |              |   |             |   |          |   |              |   |             |   |          |  
|Profit on ordinary activities before
      interest            |       |  | 691.8        |   | (37.3       | ) | 654.5    |   | 597.1        |   | (11.5       | ) | 585.6    |   | 561.7        |   | (2.8        | ) | 558.9    |  
|                                                               |       |  |              |   |             |   |          |   |              |   |             |   |          |   |              |   |             |   |          |  
|Net interest payable and similar charges:                      |       |  |              |   |             |   |          |   |              |   |             |   |          |   |              |   |             |   |          |  
|                                                               |       |  |              |   |             |   |          |   |              |   |             |   |          |   |              |   |             |   |          |  
|Group                                                          |       |  | (270.9       | ) |            |   | (270.9   | ) | (237.6       | ) |            |   | (237.6   | ) | (220.1       | ) |            |   | (220.1   | )
|                                                               |       |  |              |   |             |   |          |   |              |   |             |   |          |   |              |   |             |   |          |  
|Joint ventures                                                 | 7, 14 |  | (13.2        | ) |            |   | (13.2    | ) | (10.5        | ) |            |   | (10.5    | ) | (11.3        | ) |            |   | (11.3    | )
|                                                               |       |  |              |   |             |   |          |   |              |   |             |   |          |   |              |   |             |   |          |  
|                                                               | 7     |  | (284.1       | ) |            |   | (284.1   | ) | (248.1       | ) |            |   | (248.1   | ) | (231.4       | ) |            |   | (231.4   | )
|                                                               |       |  |              |   |             |   |          |   |              |   |             |   |          |   |              |   |             |   |          |  
|Profit on ordinary activities before
      taxation            |       |  | 407.7        |   | (37.3       | ) | 370.4    |   | 349.0        |   | (11.5       | ) | 337.5    |   | 330.3        |   | (2.8        | ) | 327.5    |  
|                                                               |       |  |              |   |             |   |          |   |              |   |             |   |          |   |              |   |             |   |          |  
|Current taxation credit on profit on
      ordinary activities | 8     |  |              |   |             |   | 31.7     |   |              |   |             |   | 20.9     |   |              |   |             |   | 29.1     |  
|                                                               |       |  |              |   |             |   |          |   |              |   |             |   |          |   |              |   |             |   |          |  
|Deferred taxation (charge)/credit on
      ordinary activities | 8     |  |              |   |             |   | (75.3    | ) |              |   |             |   | 3.4      |   |              |   |             |   | (85.9    | )
|                                                               |       |  |              |   |             |   |          |   |              |   |             |   |          |   |              |   |             |   |          |  
|Taxation credit on exceptional items                           | 8     |  |              |   |             |   | 8.1      |   |              |   |             |   | 0.8      |   |              |   |             |   | 9.4      |  
|                                                               |       |  |              |   |             |   |          |   |              |   |             |   |          |   |              |   |             |   |          |  
|Taxation on profit on ordinary activities                      | 8     |  |              |   |             |   | (35.5    | ) |              |   |             |   | 25.1     |   |              |   |             |   | (47.4    | )
|                                                               |       |  |              |   |             |   |          |   |              |   |             |   |          |   |              |   |             |   |          |  
|Profit on ordinary activities after
      taxation             |       |  |              |   |             |   | 334.9    |   |              |   |             |   | 362.6    |   |              |   |             |   | 280.1    |  
|                                                               |       |  |              |   |             |   |          |   |              |   |             |   |          |   |              |   |             |   |          |  
|Equity minority interest                                       |       |  |              |   |             |   | (1.8     | ) |              |   |             |   | (1.6     | ) |              |   |             |   | (2.3     | )
|                                                               |       |  |              |   |             |   |          |   |              |   |             |   |          |   |              |   |             |   |          |  
|Profit for the financial year                                  | 25    |  |              |   |             |   | 333.1    |   |              |   |             |   | 361.0    |   |              |   |             |   | 277.8    |  
|                                                               |       |  |              |   |             |   |          |   |              |   |             |   |          |   |              |   |             |   |          |  
|Dividends                                                      | 9, 25 |  |              |   |             |   | (324.7   | ) |              |   |             |   | (315.3   | ) |              |   |             |   | (264.8   | )
|                                                               |       |  |              |   |             |   |          |   |              |   |             |   |          |   |              |   |             |   |          |  
|Retained profit for the financial year                         |       |  |              |   |             |   | 8.4      |   |              |   |             |   | 45.7     |   |              |   |             |   | 13.0     |  
|                                                               |       |  |              |   |             |   |          |   |              |   |             |   |          |   |              |   |             |   |          |  
|Basic earnings per share                                       | 10    |  |              |   |             |   | 46.8p    |   |              |   |             |   | 54.5p    |   |              |   |             |   | 45.8p    |  
|                                                               |       |  |              |   |             |   |          |   |              |   |             |   |          |   |              |   |             |   |          |  
|Diluted earnings per share                                     | 10    |  |              |   |             |   | 42.2p    |   |              |   |             |   | 52.1p    |   |              |   |             |   | 45.7p    |  
|                                                               |       |  |              |   |             |   |          |   |              |   |             |   |          |   |              |   |             |   |          |  
|See
      accompanying notes to the accounts.                  |       |  |              |   |             |   |          |   |              |   |             |   |          |   |             

There were no differences
  between reported profits and historical cost profits on ordinary activities
  before taxation in any of the above financial years.

All activities relate
  to continuing operations.

|56 | United Utilities
      Annual Report & Accounts 2005
|-- | ----------------------------------------------------

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Financial statementsBalance sheets

|                                                              |      |  | Group    |   | Company  |  
|------------------------------------------------------------- | ---- |  | -------- | - | -------- | -
|                                                              |      |  |          |   |          |  
|                                                              |      |  | 2005     |   | 2004     |  
|At 31 March                                                   | Note |  | £m       |   | £m       |  
|                                                              |      |  |          |   |          |  
|Fixed assets                                                  |      |  |          |   |          |  
|                                                              |      |  |          |   |          |  
|Intangible assets                                             | 12   |  | 116.9    |   | 116.1    |  
|                                                              |      |  |          |   |          |  
|Tangible assets                                               | 13   |  | 8,234.9  |   | 7,769.4  |  
|                                                              |      |  |          |   |          |  
|Investments in
      subsidiary undertakings                  | 14   |  |         |   |         |  
|                                                              |      |  |          |   |          |  
|Investments in
      joint ventures:                          |      |  |          |   |          |  
|                                                              |      |  |          |   |          |  
| share of
      gross assets                                 |      |  | 281.0    |   | 300.5    |  
|                                                              |      |  |          |   |          |  
| share of
      gross liabilities                            |      |  | (210.5   | ) | (230.5   | )
|                                                              |      |  |          |   |          |  
|                                                              | 14   |  | 70.5     |   | 70.0     |  
|                                                              |      |  |          |   |          |  
|Other investments                                             | 14   |  | 9.7      |   | 3.0      |  
|                                                              |      |  |          |   |          |  
|                                                              |      |  | 8,432.0  |   | 7,958.5  |  
|                                                              |      |  |          |   |          |  
|Current assets                                                |      |  |          |   |          |  
|                                                              |      |  |          |   |          |  
|Stocks                                                        | 15   |  | 19.1     |   | 17.1     |  
|                                                              |      |  |          |   |          |  
|Debtors                                                       | 16   |  | 774.9    |   | 493.9    |  
|                                                              |      |  |          |   |          |  
|Investments                                                   | 17   |  | 833.3    |   | 1,007.8  |  
|                                                              |      |  |          |   |          |  
|Cash at bank and
      in hand                                |      |  | 49.0     |   | 42.1     |  
|                                                              |      |  |          |   |          |  
|                                                              |      |  | 1,676.3  |   | 1,560.9  |  
|                                                              |      |  |          |   |          |  
|Creditors: amounts
      falling due within one year          | 18   |  | (1,756.6 | ) | (1,374.8 | )
|                                                              |      |  |          |   |          |  
|Net current (liabilities)/assets                              |      |  | (80.3    | ) | 186.1    |  
|                                                              |      |  |          |   |          |  
|Total assets less
      current liabilities                   |      |  | 8,351.7  |   | 8,144.6  |  
|                                                              |      |  |          |   |          |  
|Creditors: amounts
      falling due after more than one year | 19   |  | (4,820.5 | ) | (4,702.0 | )
|                                                              |      |  |          |   |          |  
|Provisions for
      liabilities and charges                  | 21   |  | (412.5   | ) | (339.7   | )
|                                                              |      |  |          |   |          |  
|Net assets                                                    |      |  | 3,118.7  |   | 3,102.9  |  
|                                                              |      |  |          |   |          |  
|Capital and reserves                                          |      |  |          |   |          |  
|                                                              |      |  |          |   |          |  
|Called up share
      capital                                 | 25   |  | 716.2    |   | 711.8    |  
|                                                              |      |  |          |   |          |  
|Share premium
      account                                   | 25   |  | 1,038.7  |   | 1,023.1  |  
|                                                              |      |  |          |   |          |  
|Profit and loss
      account                                 | 25   |  | 1,362.5  |   | 1,348.4  |  
|                                                              |      |  |          |   |          |  
|Other reserves                                                | 25   |  |         |   |         |  
|                                                              |      |  |          |   |          |  
|Equity shareholders
      funds                              |      |  | 3,117.4  |   | 3,083.3  |  
|                                                              |      |  |          |   |          |  
|Equity minority
      interest                                |      |  | 1.3      |   | 19.6     |  
|                                                              |      |  |          |   |          |  
|Capital employed                                              |      |  | 3,118.7  |   | 3,102.9  |  
|                                                              |      |  |          |   |          |  

|See accompanying
      notes to the accounts.                                      
|-----------------------------------------------------------------------------------
|                                                                                   
|Approved by the
      board of directors on 1 June 2005 and signed on its behalf by



|Sir Richard Evans | Simon
      Batey           
|----------------- | ----------------------------
|Chairman          | Group finance
      director



|United Utilities
      Annual Report & Accounts 2005 | 57
|---------------------------------------------------- | --

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Financial statementsConsolidated cash flow statement

|                                                          |        |  | 2005   |   | 2004     |   | 2003   |  
|--------------------------------------------------------- | ------ |  | ------ | - | -------- | - | ------ | -
|For the year ended 31 March                               | Note   |  | £m     |   | £m       |   | £m     |  
|                                                          |        |  |        |   |          |   |        |  
|Net cash inflow from operating activities                 | 29     |  | 724.9  |   | 923.5    |   | 851.5  |  
|                                                          |        |  |        |   |          |   |        |  
|Income from joint ventures                                |        |  | 3.1    |   | 1.2      |   | 2.8    |  
|                                                          |        |  |        |   |          |   |        |  
|Returns on investments and servicing of finance           | 30     |  | (263.1 | ) | (151.8   | ) | (218.9 | )
|                                                          |        |  |        |   |          |   |        |  
|Taxation                                                  |        |  | 0.9    |   | (2.6     | ) |       |  
|                                                          |        |  |        |   |          |   |        |  
|Capital expenditure and financial investment              | 31     |  | (883.8 | ) | (1,018.0 | ) | (697.9 | )
|                                                          |        |  |        |   |          |   |        |  
|Acquisitions and disposals                                |        |  |        |   |          |   |        |  
|                                                          |        |  |        |   |          |   |        |  
|Acquisitions                                              | 32     |  | (48.2  | ) | (46.0    | ) | (4.9   | )
|                                                          |        |  |        |   |          |   |        |  
|Disposals                                                 | 32     |  | 65.2   |   |         |   | 7.9    |  
|                                                          |        |  |        |   |          |   |        |  
|                                                          |        |  | 17.0   |   | (46.0    | ) | 3.0    |  
|                                                          |        |  |        |   |          |   |        |  
|Equity dividends paid                                     |        |  | (317.5 | ) | (281.2   | ) | (262.0 | )
|                                                          |        |  |        |   |          |   |        |  
|Cash outflow before use of liquid resources and financing |        |  | (718.5 | ) | (574.9   | ) | (321.5 | )
|                                                          |        |  |        |   |          |   |        |  
|Management of liquid resources                            | 33     |  | 176.9  |   | (338.4   | ) | (282.0 | )
|                                                          |        |  |        |   |          |   |        |  
|Financing                                                 |        |  |        |   |          |   |        |  
|                                                          |        |  |        |   |          |   |        |  
|Issues of shares                                          | 34     |  | 20.0   |   | 504.1    |   | 3.3    |  
|                                                          |        |  |        |   |          |   |        |  
|Increase in debt                                          | 34, 35 |  | 523.3  |   | 418.8    |   | 610.5  |  
|                                                          |        |  |        |   |          |   |        |  
|                                                          |        |  | 543.3  |   | 922.9    |   | 613.8  |  
|                                                          |        |  |        |   |          |   |        |  
|Increase in cash                                          |        |  | 1.7    |   | 9.6      |   | 10.3   |  
|                                                          |        |  |        |   |          |   |        |  

Reconciliation of net cash
flow to movement in net debt

|                                                          |        |  | 2005     |   | 2004     |   | 2003     |  
|--------------------------------------------------------- | ------ |  | -------- | - | -------- | - | -------- | -
|For the year ended 31 March                               | Note   |  | £m       |   | £m       |   | £m       |  
|                                                          |        |  |          |   |          |   |          |  
|Increase in cash                                          |        |  | 1.7      |   | 9.6      |   | 10.3     |  
|                                                          |        |  |          |   |          |   |          |  
|Cash inflow from increase in debt and lease financing     | 34, 35 |  | (523.3   | ) | (418.8   | ) | (610.5   | )
|                                                          |        |  |          |   |          |   |          |  
|Cash (inflow)/outflow from management of liquid resources | 33     |  | (176.9   | ) | 338.4    |   | 282.0    |  
|                                                          |        |  |          |   |          |   |          |  
|Change in net debt resulting from cash flows              | 35     |  | (698.5   | ) | (70.8    | ) | (318.2   | )
|                                                          |        |  |          |   |          |   |          |  
|Exchange and other non-cash adjustments                   | 35     |  | (4.2     | ) | 6.3      |   | 5.1      |  
|                                                          |        |  |          |   |          |   |          |  
|Movement in net debt                                      |        |  | (702.7   | ) | (64.5    | ) | (313.1   | )
|                                                          |        |  |          |   |          |   |          |  
|Opening net debt                                          |        |  | (3,438.4 | ) | (3,373.9 | ) | (3,060.8 | )
|                                                          |        |  |          |   |          |   |          |  
|Net debt at 31 March                                      | 35     |  | (4,141.1 | ) | (3,438.4 | ) | (3,373.9 | )
|                                                          |        |  |          |   |          |   |          |  

Statement of total recognised gains
  and losses

|                                                                  |       |  |       |  |       |  | Group |  
|----------------------------------------------------------------- | ----- |  | ----- |  | ----- |  | ----- | -
|                                                                  |       |  |       |  |       |  |       |  
|                                                                  |       |  | 2005  |  | 2004  |  | 2003  |  
|For the year ended 31 March                                       | Note  |  | £m    |  | £m    |  | £m    |  
|                                                                  |       |  |       |  |       |  |       |  
|Profit for the period                                             |       |  |       |  |       |  |       |  
|                                                                  |       |  |       |  |       |  |       |  
|Group                                                             |       |  | 321.4 |  | 360.3 |  | 275.9 |  
|                                                                  |       |  |       |  |       |  |       |  
|Joint ventures                                                    | 14    |  | 11.7  |  | 0.7   |  | 1.9   |  
|                                                                  |       |  |       |  |       |  |       |  
|                                                                  | 25    |  | 333.1 |  | 361.0 |  | 277.8 |  
|                                                                  |       |  |       |  |       |  |       |  
|Currency translation adjustment on equity investment in Argentina | 4, 25 |  |      |  |      |  | (6.8  | )
|                                                                  |       |  |       |  |       |  |       |  
|Other exchange adjustments                                        | 25    |  | 3.7   |  | 2.2   |  | 4.0   |  
|                                                                  |       |  |       |  |       |  |       |  
|Total recognised gains and losses since last annual report        |       |  | 336.8 |  | 363.2 |  | 275.0 |  
|                                                                  |       |  |       |  |       |  |       |  

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|58 | United Utilities Annual Report & Accounts 2005

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Financial statements
Reconciliations of movements in equity
shareholders funds

|                                                                   |      |  |         |   |         |   | Group   |   |          |   | Company |  
|------------------------------------------------------------------ | ---- |  | ------- | - | ------- | - | ------- | - | -------- | - | ------- | -
|                                                                   |      |  |         |   |         |   |         |   |          |   |         |  
|                                                                   |      |  | 2005    |   | 2004    |   | 2003    |   | 2005     |   | 2004    |  
|For the year ended 31 March                                        | Note |  | £m      |   | £m      |   | £m      |   | £m       |   | £m      |  
|                                                                   |      |  |         |   |         |   |         |   |          |   |         |  
|Profit for the period                                              | 25   |  | 333.1   |   | 361.0   |   | 277.8   |   | 316.4    |   | 269.6   |  
|                                                                   |      |  |         |   |         |   |         |   |          |   |         |  
|Dividends                                                          | 25   |  | (324.7  | ) | (315.3  | ) | (264.8  | ) | (324.7   | ) | (315.3  | )
|                                                                   |      |  |         |   |         |   |         |   |          |   |         |  
|Retained profit/(loss) for the financial year                      |      |  | 8.4     |   | 45.7    |   | 13.0    |   | (8.3     | ) | (45.7   | )
|                                                                   |      |  |         |   |         |   |         |   |          |   |         |  
|New share capital issued                                           | 25   |  | 20.0    |   | 504.1   |   | 3.3     |   | 20.0     |   | 504.1   |  
|                                                                   |      |  |         |   |         |   |         |   |          |   |         |  
|Goodwill on business disposals                                     | 25   |  |        |   |        |   | 0.9     |   |         |   |        |  
|                                                                   |      |  |         |   |         |   |         |   |          |   |         |  
|Currency translation adjustment on equity investment in Argentina  | 25   |  |        |   |        |   | (6.8    | ) |         |   |        |  
|                                                                   |      |  |         |   |         |   |         |   |          |   |         |  
|Own shares released from/(held in) employee share trust            | 25   |  | 2.0     |   | (2.3    | ) |        |   | 2.0      |   | (2.3    | )
|                                                                   |      |  |         |   |         |   |         |   |          |   |         |  
|Revaluation adjustment                                             | 25   |  |        |   |        |   |        |   | (1,201.0 | ) |        |  
|                                                                   |      |  |         |   |         |   |         |   |          |   |         |  
|Other exchange adjustments                                         | 25   |  | 3.7     |   | 2.2     |   | 4.0     |   |         |   |        |  
|                                                                   |      |  |         |   |         |   |         |   |          |   |         |  
|Net increase/(decrease) in equity shareholders funds for the year |      |  | 34.1    |   | 549.7   |   | 14.4    |   | (1,187.3 | ) | 456.1   |  
|                                                                   |      |  |         |   |         |   |         |   |          |   |         |  
|Opening equity shareholders funds                                 |      |  | 3,083.3 |   | 2,533.6 |   | 2,519.2 |   | 5,479.6  |   | 5,023.5 |  
|                                                                   |      |  |         |   |         |   |         |   |          |   |         |  
|Equity shareholders funds at end of the year                      |      |  | 3,117.4 |   | 3,083.3 |   | 2,533.6 |   | 4,292.3  |   | 5,479.6 |  
|                                                                   |      |  |         |   |         |   |         |   |          |   |         |  

|                                               |   
|---------------------------------------------- | --
|United Utilities Annual Report & Accounts 2005 | 59

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Financial statementsNotes to the accounts

1ACCOUNTING POLICIESThe following
accounting policies have been applied consistently in dealing with items that
are considered material
in relation to the groups financial statements. (a)   Basis of preparation of financial
statementsThe consolidated financial statements of United Utilities PLC and its subsidiaries (the group) set out on pages 56 to 84 have been prepared under the historical cost convention and in accordance with
applicable United Kingdom accounting standards and the Companies Act 1985, except as noted below under item (h). Unless otherwise stated, the acquisition method of accounting has been adopted. Under this method, the results of subsidiary undertakings acquired or disposed of in the year are included in the
consolidated profit and loss account from the date of acquisition or up to the date of disposal. The preparation of financial statements, in conformity with generally accepted accounting principles in the United Kingdom, requires management to make estimates and assumptions that affect
the: 
   reported amounts of assets and liabilities;
   disclosure of contingent assets and liabilities at the date of the financial statements; and
   reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (b)   CashIn the consolidated cash flow statement and related notes, cash includes cash at bank, deposits repayable on demand and overdrafts. Deposits are repayable on demand if they are, in practice,
available within 24 hours without penalty. (c)   TurnoverTurnover represents the income receivable in the ordinary course of business for goods or 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 year end, exclusive of value added tax and foreign sales tax. (d)   Research and developmentExpenditure on research and development is expensed as incurred. (e)   Pre-contract costsCosts incurred
in the development of activities are treated in accordance with Urgent Issues
Task Force (UITF)
Abstract 34 Pre-contract costs, which requires that pre-contract
costs should only be recognised as an asset after the point where it is virtually
certain that a contract will be entered into with net cash inflows that will
recover the costs capitalised. Such capitalised costs are amortised over the
expected contract
period. (f)   GoodwillPurchased goodwill
(both positive and negative) arising on consolidation in respect of acquisitions
before 1 April
1998, when Financial Reporting Standard (FRS) 10 Goodwill and intangible
assets was adopted, was written off to reserves in the year of acquisition.
When a subsequent disposal occurs, any related goodwill previously written off
to reserves is written back through the profit and loss account as part of the
profit or
loss on disposal. Purchased goodwill (representing the excess of the fair value of the consideration and associated costs over the fair value of the separable net assets acquired) arising on consolidation in respect
of acquisitions post 1 April 1998 is capitalised. Positive goodwill is amortised to nil by equal annual instalments over its estimated useful life, generally not exceeding 20 years. On the subsequent
        disposal or termination of a business acquired post 1 April 1998, the
        profit or loss on disposal or termination is calculated after charging/(crediting)
        the unamortised amount of any related goodwill/(negative goodwill). In the companys financial statements,
investments in subsidiary undertakings and joint ventures are stated at cost
less provision for any impairment. (g)   Tangible fixed assetsTangible fixed assets comprise 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). Infrastructure assetsInfrastructure assets comprise a network of water and wastewater systems. Expenditure on infrastructure assets relating to increases in capacity or enhancements of the network and on maintaining the
operating capability of the network in accordance with defined standards of service is treated as an addition, which is included at cost after deducting related grants and contributions. The depreciation charge for infrastructure
assets is the estimated level of annual expenditure required to maintain the
operating capability of the network, which is based on the groups
independently certified asset management plan. Employee costs incurred in implementing the capital schemes of the group are capitalised within fixed assets. Other assetsAdditions are
included at cost. Freehold land is not depreciated. Other assets are depreciated
by writing off their cost
less their estimated residual value evenly over their estimated economic lives,
based on managements judgement and experience, which are principally as
follows: Buildings
   30-60 yearsOperational assets
   5-80 yearsFixtures, fittings, tools and equipment
   3-40 yearsComputer software
   3-10 years Carrying value
  of tangible fixed assetsThe carrying values of fixed assets are reviewed for impairment wherever circumstances indicate that the carrying value of such assets may not be recoverable. (h)   Grants and contributionsCapital
contributions towards infrastructure assets are deducted from the cost of those
assets. This is not in accordance
with Schedule 4 to the Companies Act 1985, under which the infrastructure assets
should be stated at their purchase price or production cost and the capital contributions
treated as deferred income and released to the profit and loss account over the
useful life of the corresponding assets. The directors are of the
opinion that, although provision is made for depreciation of infrastructure assets
(see item (g) above), these assets have no finite economic lives and the capital
contributions would therefore remain in the balance sheet in perpetuity. The
treatment otherwise required by the Companies Act 1985 would not present a true
and fair view of the groups effective investment in infrastructure assets.
The financial effect of this accounting policy is set out in note 13. Grants receivable in respect of other tangible fixed assets are treated as deferred income, which is credited to the profit and loss account over the estimated economic lives of the related
assets. (i)   Leased assetsAssets financed by leasing arrangements, which transfer substantially all the risks and rewards of ownership to the lessee (finance leases), are capitalised in the consolidated balance sheet and the
corresponding capital cost is shown as an obligation to the lessor. Leasing repayments comprise both a capital and a finance element. Where the lease is of a fixed interest rate nature, the finance element is written off to the profit and loss
account so as 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 profit and loss account 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 lease rentals are charged to the profit and loss account on a straight line basis over the period of the lease. (j)   Fixed asset investmentsFixed asset investments, except for investments in joint ventures, are stated at the lower of cost and recoverable amount. The consolidated profit and


|   |                                               
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|60 | United Utilities Annual Report & Accounts 2005

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loss account includes
  the groups share of the profits less losses, interest and taxation of
  joint ventures. The group balance sheet includes the investment in joint ventures
  at the groups share of their net assets in accordance with FRS 9 Associates
  and Joint Ventures. (k)
    Current asset
        investmentsCurrent
        asset investments are stated at the lower of cost and net realisable value.(l)
    StocksStocks
        are stated at cost less any provision necessary to recognise damage and
        obsolescence. Finished goods and
  goods for resale are stated at the lower of cost, including appropriate production
  overheads, and net realisable value. (m)
    PensionsThe
      group operates a number of defined benefit 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
      trustees 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. The cost of providing
  pensions is expensed over employees working lives. Variations from regular
  cost are allocated over the average remaining service lives of current employees.
  Any difference between the charge to the profit and loss account in respect
  of funded plans and the contributions payable to each plan is recorded in the
  consolidated balance sheet as a prepayment or provision. In addition, the
  group also operates a defined contribution scheme, for which the amount charged
  to the profit and loss account in respect of pension costs is the contributions
  payable in the year. Differences between contributions payable in the year and
  contributions paid are shown as either accruals or prepayments in the balance
  sheet. The group has included
  the disclosure requirements of FRS 17 Retirement Benefits in note
  26, together with details of pension and funding arrangements. (n)
    Foreign currencyTransactions
      in foreign currencies are recorded at the exchange rates ruling on the dates
      of the transactions, adjusted for the effects of any hedging arrangements.
      Assets and liabilities denominated in foreign currencies are translated
      into sterling at the relevant rates of exchange ruling at the consolidated
      balance sheet date. On consolidation,
         the balance sheets of overseas subsidiaries and joint ventures are translated

  into sterling at exchange rates applicable at the year end. The profit and
        loss  accounts are translated into sterling using the average rate. Exchange
        differences
  resulting from the translation of such balance sheets at rates ruling at the
         beginning and end of the year, together with the differences between
        profit
  and loss accounts translated at average rates and rates ruling at 31 March,
         are dealt with as movements on group reserves. Where net investments
          in overseas
    subsidiaries are matched in whole or in part by foreign currency borrowings,
           the exchange differences arising on the re-translation of such borrowings
          are
    also recorded as movements on group reserves to the extent allowed by Statement
           of Standard Accounting Practice (SSAP) 20 Foreign currency translation.
            Any excess is taken to the profit and loss account. (o)
      TaxationCurrent
               tax, including UK corporation tax and foreign tax, is provided
              at amounts
        expected to be paid (or recovered) using the tax rates and laws that
              have been enacted or substantially enacted by the balance sheet
              date.
      Deferred

      tax is recognised in respect of all timing differences that have originated
                 but not reversed at the balance sheet date where transactions
                or events
          that result in an obligation to pay more tax in the future or a right
                to pay less tax in the future have occurred. Timing differences
                are
                differences
          between the groups taxable profits and its results as stated in
          the financial statements that arise from the inclusion of gains and losses
          in
          tax assessments in periods different from those in which they are recognised
       in




the financial statements. Deferred tax is
  measured at the average tax rates that are expected to apply in the periods
  in which the timing differences are expected to reverse, based on tax rates
  and laws that have been enacted or substantially enacted by the balance sheet
  date. Deferred tax is measured on a discounted basis to reflect the time value
  of money over the period between the balance sheet date and the dates on which
  it is estimated that the underlying timing differences will reverse. The discount
  rates used reflect the post-tax yields to maturity that can be obtained on government
  bonds with similar maturity dates and currencies to those of the deferred tax
  assets or liabilities. (p)
    Joint venturesJoint
      ventures are entities in which United Utilities PLC holds an interest on
      a long-term basis and which are jointly controlled with one or more other
      parties under a contractual arrangement. The groups share of profits,
      less losses of joint ventures, is included in the consolidated profit and
      loss account on the gross equity accounting basis.(q)
    Financial instrumentsDebt
      instrumentsNew
      borrowings are stated at net proceeds received after deduction of issue
      costs. The issue costs of debt instruments are amortised at a constant rate
      over the life of the instrument. Interest rate
  swaps and financial futuresInterest rate swap
  agreements and financial futures are used to manage interest rate exposure.
  Instruments that are designed as a hedge of a debt are accounted for on an accruals
  basis, with amounts payable or receivable in respect of these instruments being
  recognised as adjustments to interest expense of the designated liability. Realised gains
        and  losses that occur from the early termination of such instruments
        designated
  as a hedge are deferred and are amortised to interest expense over the period
         of the hedged position, to the extent that the originally designated
        liability
  remains outstanding. In order to qualify
        for hedge accounting, the notional amount of the groups interest rate swaps and financial futures
           must not  exceed the amount of its existing variable rate debt, must
           change the interest
    rate characteristics of the underlying debt and the contractual maturities
           cannot  exceed the maturities of the debt. Currency swapsThe group enters into
  currency swaps to manage its exposure to fluctuations in currency rates. Principal
  amounts are 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
  qualify for hedge accounting, the forward contract/currency swap must relate
  to an existing asset, liability or firm commitment, be in the same currency
  as the hedged item and reduce the risk of foreign currency exchange movements
  to the groups operations. Where they do, exchange gains and losses are
  taken directly to reserves and are included in the statement of total recognised
  gains and losses in accordance with SSAP 20 Foreign currency translation. (r)
    Share-based
      compensation arrangementsShares
      issued as a result of the exercise of options granted in accordance with
      the rules of the schemes (see note 25) are recorded in share capital and
      share premium at their exercise price at the date the option is exercised.
      A compensation expense is recorded in respect of the executive share option
      schemes for the difference, if any, between the exercise price and the share
      price at the date of grant. The costs of short-term
         and long-term incentive awards are expensed on a straight line basis
        over the
  period in which performance is measured. The amount to be expensed is based
         upon managements estimate of the probability that the performance
         criteria  will be met. In respect of the
        groups Sharesave schemes,
           no compensation  expense is recorded for the difference between the
           exercise price and the share
    price at the date of grant or exercise, as the group is taking advantage of
            the exemption permitted by UITF 17 Employee share schemes in
            respect  of Inland Revenue approved SAYE schemes. (s)
    Environmental
      remediationEnvironmental
        expenditure that relates to current or future revenues is


|                                                     |   
|---------------------------------------------------- | --
|United
      Utilities Annual Report & Accounts 2005 | 61

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Financial statements******Notes
to the accounts continued**



expensed or capitalised
         as appropriate. Expenditure that relates to an existing condition caused
        by
  past operations and does not contribute to current or future earnings is expensed. Liabilities
          for environmental costs are recognised when there is a legal or  constructive
          obligation, environmental assessments or clean-ups are probable
    and the associated costs can be reasonably estimated. Generally, the timing
           of these provisions coincides with the commitment to a formal plan
        of action
    or, if earlier, on divestment or on closure of inactive sites. (t)
    Recent UK accounting
      pronouncementsThe
      accounts for the year ended 31 March 2005 have been prepared under UK GAAP.
      These policies will be replaced by International Financial Reporting Standards
      (IFRS) with effect from 1 April 2005 and the group will publish its interim
      financial statements and 2006 Annual Report and Accounts in accordance with
      IFRS.




|   |                                                     
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|62 | United
      Utilities Annual Report & Accounts 2005

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|2                                                                                                                                              | SEGMENTAL INFORMATION
|---------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------
|Turnover,
      total operating profit and net operating assets for each class of business
      and by geographical origin are set out below:

|                                        |      |          |         |                              |         |                            |         |   
|--------------------------------------- | ---- | -------- | ------- | ---------------------------- | ------- | -------------------------- | ------- | --
|                                        |      | Turnover | 2(a)    | Total
      operating profit | 2(b)    | Net
      operating assets | 2(c)   
|                                        |      |          |         |                              |         |                            |        
|                                        |      | 2005     |         | 2004                         |         | 2003                       | 2005    |   
|Note                                    |      | £m       | £m      | £m                           | £m      | £m                         | £m      | £m
|                                        |      |          |         |                              |         |                            |         |   
|Continuing businesses:                  |      |          |         |                              |         |                            |         |   
|                                        |      |          |         |                              |         |                            |         |   
|Licensed multi-utility
      operations |      |          | 1,384.7 |                              | 1,300.7 |                            | 1,230.1 |   
|                                        |      |          |         |                              |         |                            |         |   
|Infrastructure
      management         |      |          | 543.1   |                              | 446.9   |                            | 397.1   |   
|                                        |      |          |         |                              |         |                            |         |   
|Business process
      outsourcing      |      |          | 396.4   |                              | 368.5   |                            | 307.6   |   
|                                        |      |          |         |                              |         |                            |         |   
|Telecommunications                      |      |          | 233.6   |                              | 185.6   |                            | 161.7   |   
|                                        |      |          |         |                              |         |                            |         |   
|Other activities                        |      |          |        |                              |        |                            |        |   
|                                        |      |          |         |                              |         |                            |         |   
|Corporate costs                         |      |          |        |                              |        |                            |        |   
|                                        |      |          |         |                              |         |                            |         |   
|                                        |      |          | 2,557.8 |                              | 2,301.7 |                            | 2,096.5 |   
|                                        |      |          |         |                              |         |                            |         |   
|Goodwill amortisation                   | 2(d) |          |        |                              |        |                            |        |   
|                                        |      |          |         |                              |         |                            |         |   
|Inter-business
      eliminations       | 2(e) |          | (189.6  | )                            | (186.2  | )                          | (176.0  | ) 
|                                        |      |          |         |                              |         |                            |         |   
|Continuing operations,
      before     |      |          |         |                              |         |                            |         |   
|exceptional
      charge                |      |          | 2,368.2 |                              | 2,115.5 |                            | 1,920.5 |   
|                                        |      |          |         |                              |         |                            |         |   
|Exceptional
      items                 | 2(f) |          |        |                              |        |                            |        |   
|                                        |      |          |         |                              |         |                            |         |   
|                                        |      |          | 2,368.2 |                              | 2,115.5 |                            | 1,920.5 |   
|                                        |      |          |         |                              |         |                            |         |   
|By geographical
      origin:           | 2(g) |          |         |                              |         |                            |         |   
|                                        |      |          |         |                              |         |                            |         |   
|United Kingdom                          |      |          | 2,287.1 |                              | 2,051.5 |                            | 1,868.3 |   
|                                        |      |          |         |                              |         |                            |         |   
|Europe                                  |      |          | 29.9    |                              | 18.9    |                            | 12.5    |   
|                                        |      |          |         |                              |         |                            |         |   
|Rest of the
      world                 |      |          | 51.2    |                              | 45.1    |                            | 39.7    |   
|                                        |      |          |         |                              |         |                            |         |   
|                                        |      |          | 2,368.2 |                              | 2,115.5 |                            | 1,920.5 |   
|                                        |      |          |         |                              |         |                            |         |   

|                                                                                                       
|-------------------------------------------------------------------------------------------------------
|The
      accounting policies for each segment are the same as those appearing on
      pages 60 to 62.
|                                                                                                       
|(a)                                                                                                    
|                                                                                                       
|(b)                                                                                                    
|                                                                                                       
|                                                                                                       
|                                                                                                       
|(c)                                                                                                    
|                                                                                                       
|(d)                                                                                                    
|                                                                                                       
|(e)                                                                                                    
|                                                                                                       
|(f)                                                                                                    
|                                                                                                       
|                                                                                                       
|                                                                                                       
|(g)                                                                                                    

|                                                     |   
|---------------------------------------------------- | --
|United
      Utilities Annual Report & Accounts 2005 | 63

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Back to Contents

Financial statements
Notes to the accounts continued

|3 | NET OPERATING
    COSTS
|- | -----------------------

|                                                                    |      |         |   |         |   |         |  
|------------------------------------------------------------------- | ---- | ------- | - | ------- | - | ------- | -
|                                                                    |      | 2005    |   | 2004    |   | 2003    |  
|                                                                    | Note | £m      |   | £m      |   | £m      |  
|                                                                    |      |         |   |         |   |         |  
|Employee costs:                                                     | 3(a) |         |   |         |   |         |  
|                                                                    |      |         |   |         |   |         |  
|Wages and salaries                                                  |      | 418.6   |   | 383.0   |   | 329.8   |  
|                                                                    |      |         |   |         |   |         |  
|Social security costs                                               |      | 34.1    |   | 30.9    |   | 24.6    |  
|                                                                    |      |         |   |         |   |         |  
|Pension costs                                                       | 26   | 54.5    |   | 11.2    |   | 8.2     |  
|                                                                    |      |         |   |         |   |         |  
|                                                                    |      | 507.2   |   | 425.1   |   | 362.6   |  
|                                                                    |      |         |   |         |   |         |  
|Capital schemes and charges against provisions                      |      | (81.4   | ) | (72.0   | ) | (69.8   | )
|                                                                    |      |         |   |         |   |         |  
|                                                                    |      | 425.8   |   | 353.1   |   | 292.8   |  
|                                                                    |      |         |   |         |   |         |  
|Depreciation:                                                       | 3(b) |         |   |         |   |         |  
|                                                                    |      |         |   |         |   |         |  
|Owned fixed assets                                                  |      | 364.2   |   | 366.2   |   | 345.6   |  
|                                                                    |      |         |   |         |   |         |  
|Fixed assets held under finance leases                              |      | 1.7     |   | 1.8     |   | 4.2     |  
|                                                                    |      |         |   |         |   |         |  
|Amortisation of intangible assets                                   |      | 15.5    |   | 8.1     |   | 7.1     |  
|                                                                    |      |         |   |         |   |         |  
|                                                                    |      | 381.4   |   | 376.1   |   | 356.9   |  
|                                                                    |      |         |   |         |   |         |  
|Other operating costs:                                              |      |         |   |         |   |         |  
|                                                                    |      |         |   |         |   |         |  
|Auditors
    remuneration for audit services                       |      | 0.6     |   | 0.6     |   | 0.5     |  
|                                                                    |      |         |   |         |   |         |  
|Research and development                                            |      | 0.8     |   | 0.8     |   | 0.8     |  
|                                                                    |      |         |   |         |   |         |  
|Operating leases:                                                   |      |         |   |         |   |         |  
|                                                                    |      |         |   |         |   |         |  
| hire
    of plant and machinery                                   |      | 5.6     |   | 5.9     |   | 4.5     |  
|                                                                    |      |         |   |         |   |         |  
| land
    and buildings                                            |      | 13.1    |   | 10.0    |   | 8.2     |  
|                                                                    |      |         |   |         |   |         |  
|Cost of sales                                                       |      | 528.6   |   | 495.6   |   | 451.2   |  
|                                                                    |      |         |   |         |   |         |  
|Rents and rates                                                     |      | 60.8    |   | 65.4    |   | 75.7    |  
|                                                                    |      |         |   |         |   |         |  
|General, administration and other costs                             |      | 196.2   |   | 193.4   |   | 163.8   |  
|                                                                    |      |         |   |         |   |         |  
|                                                                    |      | 805.7   |   | 771.7   |   | 704.7   |  
|                                                                    |      |         |   |         |   |         |  
|Other income                                                        | 5    | (11.9   | ) | (15.6   | ) | (14.9   | )
|                                                                    |      |         |   |         |   |         |  
|                                                                    |      | 793.8   |   | 756.1   |   | 689.8   |  
|                                                                    |      |         |   |         |   |         |  
|Net operating costs before exceptional items                        |      | 1,601.0 |   | 1,485.3 |   | 1,339.5 |  
|                                                                    |      |         |   |         |   |         |  
|Exceptional items:                                                  |      |         |   |         |   |         |  
|                                                                    |      |         |   |         |   |         |  
| business
    restructuring                                        | 3(a) | 29.7    |   | 4.6     |   | 3.8     |  
|                                                                    |      |         |   |         |   |         |  
| adjustment
    to the carrying value of telecommunications assets | 3(b) |        |   |        |   | 25.5    |  
|                                                                    |      |         |   |         |   |         |  
|Total net operating costs                                           |      | 1,630.7 |   | 1,489.9 |   | 1,368.8 |  
|                                                                    |      |         |   |         |   |         |  

|Fees
           paid or payable to Deloitte & Touche LLP and its associates for non-audit services during the year were £1.1 million (2004  £1.2 million)
primarily relating to regulatory returns, work associated with raising debt and equity finance, due diligence and tax work. Further analysis of non-audit fees is included within the Corporate Governance section of this report. The audit fee for 2005
in relation to the company amounted to £90,000 (2004  £81,000).
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Information relating to the emoluments, long-term incentives, share options and pension entitlements of the directors is contained in the report on
remuneration.                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  



|64 | United
    Utilities Annual Report & Accounts 2005
|-- | --------------------------------------------------

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Back to Contents

|4 | NON-OPERATING EXCEPTIONAL
    ITEMS
|- | -----------------------------------

|                                            |      |  |      |   |      | 
|------------------------------------------- | ---- |  | ---- | - | ---- | 
|                                            | 2005 |  | 2004 |   | 2003 | 
|                                            | £m   |  | £m   |   | £m   | 
|                                            |      |  |      |   |      | 
|Profit on sale or termination of operations | 4.5  |  | 4.3  |   | 34.0 | 
|                                            |      |  |      |   |      | 
|Profit/(loss) on disposal of fixed assets   | 4.1  |  | (2.4 | ) |     | 
|                                            |      |  |      |   |      | 
|                                            | 8.6  |  | 1.9  |   | 34.0 | 
|                                            |      |  |      |   |      | 

In 2005, the groups shareholding in Manila Water Company Inc reduced from 17.96 per cent to 11.68 per cent following its successful listing on the Philippine Stock Exchange during which the
group placed part of its shareholding. The Green Energy business was also sold and a further credit was recognised relating to the withdrawal from infrastructure management in the Americas. Together the transactions gave rise to an exceptional
credit of £4.5 million.

In 2004, a credit of £4.3 million
was recognised relating to the withdrawal from infrastructure management in the
Americas.

IEBA, the Argentine electricity utility
for which United Utilities has been technical operator and, in which, the group
had a minority interest, defaulted on its repayments to bondholders in September
2002. There was no recourse to United Utilities in respect of these debts and
the group has no further balance sheet exposure to IEBA. Following the Argentine
governments dissolution of the Peso/US Dollar link, the subsequent
devaluation of the Argentine Peso and the restrictions placed on the utilitys pricing policies, there was no expectation of a financial restructuring of the utility in which United Utilities would choose to participate. United Utilities
notified IEBA and its majority shareholder, Gruppo Camuzzi, that it would neither inject any additional equity into the company nor, with the exception of meeting the groups obligations under the technical support contract, participate in the
future management of IEBA and its operating subsidiary, EDEA. United Utilities therefore concluded that it no longer had a participating interest in IEBA. The accounting provision that existed at 31 March 2002 in respect of the investment in
Argentina, was taken to the profit and loss account in 2003 which, along with the disposal of US Water and costs associated with withdrawing from infrastructure management in the Americas, gave rise to an exceptional credit of £34.0
million.
The group sold its minority interest in IEBA on 28 April 2005.

|5 | OTHER INCOME
|- | ------------

|                                                                |        |   |        |   |        |  
|--------------------------------------------------------------- | ------ | - | ------ | - | ------ | -
|                                                                | 2005   |   | 2004   |   | 2003   |  
|                                                                | £m     |   | £m     |   | £m     |  
|                                                                |        |   |        |   |        |  
|Profit on disposal of fixed assets                              | 4.4    |   | 7.1    |   | 4.5    |  
|                                                                |        |   |        |   |        |  
|Net rents receivable                                            | 7.2    |   | 7.1    |   | 7.3    |  
|                                                                |        |   |        |   |        |  
|Dividend income                                                 | 0.3    |   | 0.8    |   | 2.6    |  
|                                                                |        |   |        |   |        |  
|Other                                                           |       |   | 0.6    |   | 0.5    |  
|                                                                |        |   |        |   |        |  
|                                                                | 11.9   |   | 15.6   |   | 14.9   |  
|                                                                |        |   |        |   |        |  
|                                                                |        |   |        |   |        |  
|                                                                |        |   |        |   |        |  
|6     EMPLOYEES                                                 |        |   |        |   |        |  
|                                                                | 2005   |   | 2004   |   | 2003   |  
|                                                                |        |   |        |   |        |  
|Licensed multi-utility operations                               | 4,889  |   | 4,684  |   | 4,269  |  
|                                                                |        |   |        |   |        |  
|Infrastructure management                                       | 2,510  |   | 2,381  |   | 2,163  |  
|                                                                |        |   |        |   |        |  
|Business process outsourcing                                    | 7,693  |   | 7,746  |   | 6,540  |  
|                                                                |        |   |        |   |        |  
|Telecommunications                                              | 682    |   | 709    |   | 681    |  
|                                                                |        |   |        |   |        |  
|Other activities                                                | 161    |   | 154    |   | 149    |  
|                                                                |        |   |        |   |        |  
|Average number of persons employed by the group during the year | 15,935 |   | 15,674 |   | 13,802 |  
|                                                                |        |   |        |   |        |  
|                                                                |        |   |        |   |        |  
|                                                                |        |   |        |   |        |  
|7     NET INTEREST
           PAYABLE AND OTHER SIMILAR CHARGES |        |   |        |   |        |  
|                                                                | 2005   |   | 2004   |   | 2003   |  
|                                                                | £m     |   | £m     |   | £m     |  
|                                                                |        |   |        |   |        |  
|Interest payable:                                               |        |   |        |   |        |  
|                                                                |        |   |        |   |        |  
|Group:                                                          |        |   |        |   |        |  
|                                                                |        |   |        |   |        |  
| on bank
    loans, overdrafts and other loans                 | 306.1  |   | 273.8  |   | 243.8  |  
|                                                                |        |   |        |   |        |  
| on finance
    leases                                         | 3.2    |   | 2.9    |   | 2.2    |  
|                                                                |        |   |        |   |        |  
|Joint ventures                                                  | 13.2   |   | 10.5   |   | 11.3   |  
|                                                                |        |   |        |   |        |  
|Total interest payable                                          | 322.5  |   | 287.2  |   | 257.3  |  
|                                                                |        |   |        |   |        |  
|Interest receivable and similar income                          | (38.4  | ) | (39.1  | ) | (25.9  | )
|                                                                |        |   |        |   |        |  
|Net interest payable and other similar charges                  | 284.1  |   | 248.1  |   | 231.4  |  
|                                                                |        |   |        |   |        |  



|United Utilities
    Annual Report & Accounts 2005 | 65
|-------------------------------------------------- | --

---



Back to Contents

Financial statementsNotes to the accounts continued



|8 | TAXATION ON PROFIT
    ON ORDINARY ACTIVITIES
|- | ---------------------------------------------

|                                                                                                                                        |       |   |        |   |       |  
|--------------------------------------------------------------------------------------------------------------------------------------- | ----- | - | ------ | - | ----- | -
|                                                                                                                                        | 2005  |   | 2004   |   | 2003  |  
|                                                                                                                                        | £m    |   | £m     |   | £m    |  
|                                                                                                                                        |       |   |        |   |       |  
|Ordinary tax:                                                                                                                           |       |   |        |   |       |  
|                                                                                                                                        |       |   |        |   |       |  
|Current tax:                                                                                                                            |       |   |        |   |       |  
|                                                                                                                                        |       |   |        |   |       |  
|UK corporation tax at 30 per cent                                                                                                       |      |   |       |   | 11.0  |  
|                                                                                                                                        |       |   |        |   |       |  
|Overseas tax                                                                                                                            | 1.7   |   | 3.2    |   | 0.1   |  
|                                                                                                                                        |       |   |        |   |       |  
|Share
    of joint ventures tax                                                                                                        | (2.2  | ) | 2.4    |   | 1.7   |  
|                                                                                                                                        |       |   |        |   |       |  
|Prior
    years tax adjustments                                                                                                        | (31.2 | ) | (26.5  | ) | (41.9 | )
|                                                                                                                                        |       |   |        |   |       |  
|Total ordinary current tax                                                                                                              | (31.7 | ) | (20.9  | ) | (29.1 | )
|                                                                                                                                        |       |   |        |   |       |  
|                                                                                                                                        |       |   |        |   |       |  
|Deferred tax:                                                                                                                           |       |   |        |   |       |  
|                                                                                                                                        |       |   |        |   |       |  
|Origination and reversal of timing differences                                                                                          | 117.3 |   | 104.6  |   | 88.2  |  
|                                                                                                                                        |       |   |        |   |       |  
|(Increase)/decrease in discount                                                                                                         | (65.6 | ) | (119.3 | ) | 0.3   |  
|                                                                                                                                        |       |   |        |   |       |  
|Prior
    years tax adjustments                                                                                                        | 23.6  |   | 11.3   |   | (2.6  | )
|                                                                                                                                        |       |   |        |   |       |  
|Total ordinary deferred tax                                                                                                             | 75.3  |   | (3.4   | ) | 85.9  |  
|                                                                                                                                        |       |   |        |   |       |  
|Total ordinary tax                                                                                                                      | 43.6  |   | (24.3  | ) | 56.8  |  
|                                                                                                                                        |       |   |        |   |       |  
|                                                                                                                                        |       |   |        |   |       |  
|Tax on exceptional items:                                                                                                               |       |   |        |   |       |  
|                                                                                                                                        |       |   |        |   |       |  
|Current tax:                                                                                                                            |       |   |        |   |       |  
|                                                                                                                                        |       |   |        |   |       |  
|Exceptional tax on restructuring of businesses                                                                                          |      |   |       |   | (6.3  | )
|                                                                                                                                        |       |   |        |   |       |  
|Deferred tax:                                                                                                                           |       |   |        |   |       |  
|                                                                                                                                        |       |   |        |   |       |  
|Origination and reversal of timing differences                                                                                          | (8.1  | ) | (0.8   | ) | (4.5  | )
|                                                                                                                                        |       |   |        |   |       |  
|Decrease in discount                                                                                                                    |      |   |       |   | 1.4   |  
|                                                                                                                                        |       |   |        |   |       |  
|Total tax on exceptional items                                                                                                          | (8.1  | ) | (0.8   | ) | (9.4  | )
|                                                                                                                                        |       |   |        |   |       |  
|Tax on profit on ordinary activities                                                                                                    | 35.5  |   | (25.1  | ) | 47.4  |  
|                                                                                                                                        |       |   |        |   |       |  
|The £8.1 million exceptional deferred tax credit is in relation to the £29.7
    million exceptional restructuring charges.             |      
|                                                                                                                                        |       |   |        |   |      
|The table below reconciles the notional tax charge at the UK corporation tax rate for the year to the actual current rate for taxation. |      
|                                                                                                                                        |       |   |        |   |       |  
|                                                                                                                                        | 2005  |   | 2004   |   | 2003  |  
|                                                                                                                                        | £m    |   | £m     |   | £m    |  
|                                                                                                                                        |       |   |        |   |       |  
|Profit on ordinary activities before tax                                                                                                | 370.4 |   | 337.5  |   | 327.5 |  
|                                                                                                                                        |       |   |        |   |       |  
|                                                                                                                                        |       |   |        |   |       |  
|                                                                                                                                        | %     |   | %      |   | %     |  
|                                                                                                                                        |       |   |        |   |       |  
|UK corporation tax rate                                                                                                                 | 30.0  |   | 30.0   |   | 30.0  |  
|                                                                                                                                        |       |   |        |   |       |  
|Capital allowances in excess of depreciation                                                                                            | (27.6 | ) | (41.3  | ) | (24.2 | )
|                                                                                                                                        |       |   |        |   |       |  
|Other timing differences                                                                                                                | (1.9  | ) | 10.5   |   | (1.4  | )
|                                                                                                                                        |       |   |        |   |       |  
|Withdrawal from infrastructure management in the Americas                                                                               |      |   |       |   | (4.0  | )
|                                                                                                                                        |       |   |        |   |       |  
|Prior
    years tax adjustments                                                                                                        | (8.4  | ) | (7.8   | ) | (12.8 | )
|                                                                                                                                        |       |   |        |   |       |  
|Net (income)/costs not deductible for tax purposes                                                                                      | (0.7  | ) | 2.4    |   | 1.6   |  
|                                                                                                                                        |       |   |        |   |       |  
|Actual current tax rate                                                                                                                 | (8.6  | ) | (6.2   | ) | (10.8 | )
|                                                                                                                                        |       |   |        |   |       |  
|                                                                                                                                        |       |   |        |   |       |  
|                                                                                                                                        |       |   |        |   |       |  
|9DIVIDENDS                                                                                                                              |       |   |        |   |       |  
|                                                                                                                                        | 2005  |   | 2004   |   | 2003  |  
|                                                                                                                                        | £m    |   | £m     |   | £m    |  
|                                                                                                                                        |       |   |        |   |       |  
|Ordinary shares:                                                                                                                        |       |   |        |   |       |  
|                                                                                                                                        |       |   |        |   |       |  
|Interim
           dividend of 14.79 pence per ordinary share (2004  14.43 pence; 2003  15.5
    pence)                               | 82.4  |   | 80.3   |   | 86.2  |  
|                                                                                                                                        |       |   |        |   |       |  
|Final
           dividend of 30.63 pence per ordinary share proposed (2004  29.88 pence; 2003  32.1
    pence)                        | 172.0 |   | 166.5  |   | 178.6 |  
|                                                                                                                                        |       |   |        |   |       |  
|A shares:                                                                                                                               |       |   |        |   |       |  
|                                                                                                                                        |       |   |        |   |       |  
|Interim
    dividend of 7.395 pence per A share (2004  7.215 pence)                                                                    | 22.9  |   | 22.3   |   |       |  
|                                                                                                                                        |       |   |        |   |       |  
|Final
    dividend of 15.315 pence per A share proposed (2004  14.94 pence)                                                            | 47.4  |   | 46.2   |   |       |  
|                                                                                                                                        |       |   |        |   |       |  
|                                                                                                                                        | 324.7 |   | 315.3  |   | 264.8 |  
|                                                                                                                                        |       |   |        |   |       |  

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.



|66 | United Utilities Annual Report & Accounts 2005
|-- | ----------------------------------------------

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10   EARNINGS PER SHARE

|                                                                    |         |  |         |  |         | 
|------------------------------------------------------------------- | ------- |  | ------- |  | ------- | 
|                                                                    | 2005    |  | 2004    |  | 2003    | 
|                                                                    |         |  |         |  |         | 
|Profit for the financial year attributable to ordinary shareholders | £333.1m |  | £361.0m |  | £277.8m | 
|                                                                    |         |  |         |  |         | 
|                                                                    |         |  |         |  |         | 
|                                                                    | 2005    |  | 2004    |  | 2003    | 
|                                                                    |         |  |         |  |         | 
|Basic earnings per share                                            | 46.8p   |  | 54.5p   |  | 45.8p   | 
|                                                                    |         |  |         |  |         | 
|Diluted earnings per share                                          | 42.2p   |  | 52.1p   |  | 45.7p   | 
|                                                                    |         |  |         |  |         | 

Basic earnings per share has
been calculated by dividing profit for the financial year attributable to shareholders
by 712.5 million, being the weighted average number of shares in issue during
the
year (2004  662.8 million; 2003  606.0 million).

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.

Diluted earnings per share has been
calculated by dividing profit for the financial year attributable to shareholders
by 789.2 million, being the weighted average number of shares in issue during
the
year including dilutive shares (2004  693.5 million; 2003  607.7
million).

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

|                                                                                                   | 2005    |   | 2004    |   | 2003    |  
|-------------------------------------------------------------------------------------------------- | ------- | - | ------- | - | ------- | -
|                                                                                                   | million |   | million |   | million |  
|                                                                                                   |         |   |         |   |         |  
|Average number of ordinary
          shares in issue  basic                                       | 712.5   |   | 662.8   |   | 606.0   |  
|                                                                                                   |         |   |         |   |         |  
|Average number of potentially
          dilutive ordinary shares under option                      | 13.4    |   | 10.3    |   | 10.5    |  
|                                                                                                   |         |   |         |   |         |  
|Number of ordinary
          shares that would have been issued at fair value                      | (8.0    | ) | (8.8    | ) | (8.8    | )
|                                                                                                   |         |   |         |   |         |  
|Number of A shares
          to be issued in 2005 (ordinary share equivalent)                      | 154.6   |   | 82.8    |   |         |  
|                                                                                                   |         |   |         |   |         |  
|Number of A shares
          that would have been issued at fair value (ordinary share equivalent) | (83.3   | ) | (53.6   | ) |         |  
|                                                                                                   |         |   |         |   |         |  
|Average number of ordinary
          shares in issue  diluted                                     | 789.2   |   | 693.5   |   | 607.7   |  
|                                                                                                   |         |   |         |   |         |  

The basic and diluted weighted average number of shares were restated for all periods prior to the rights issue to reflect the bonus element of the rights issue as required by FRS 14. The adjustment
factor, based on the consideration received from the first stage of the rights issue, is 0.9176, 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
EGM.

11   WITHDRAWN

|United Utilities Annual Report & Accounts 2005 | 67
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Financial statements
Notes to the accounts continued

12   INTANGIBLE FIXED ASSETS

|                      |          |   | Other       |  |       |  
|--------------------- | -------- | - | ----------- |  | ----- | -
|                      | Goodwill |   | intangibles |  | Total |  
|Group                 | £m       |   | £m          |  | £m    |  
|                      |          |   |             |  |       |  
|Cost:                 |          |   |             |  |       |  
|                      |          |   |             |  |       |  
|At 1 April 2004       | 145.0    |   | 9.0         |  | 154.0 |  
|                      |          |   |             |  |       |  
|Additions             | 27.4     |   |            |  | 27.4  |  
|                      |          |   |             |  |       |  
|Disposals (note 32)   | (11.0    | ) |            |  | (11.0 | )
|                      |          |   |             |  |       |  
|Revaluations          | (2.0     | ) |            |  | (2.0  | )
|                      |          |   |             |  |       |  
|At 31 March 2005      | 159.4    |   | 9.0         |  | 168.4 |  
|                      |          |   |             |  |       |  
|Amortisation:         |          |   |             |  |       |  
|                      |          |   |             |  |       |  
|At 1 April 2004       | 28.9     |   | 9.0         |  | 37.9  |  
|                      |          |   |             |  |       |  
|Charge for the period | 15.5     |   |            |  | 15.5  |  
|                      |          |   |             |  |       |  
|Disposals (note 32)   | (1.9     | ) |            |  | (1.9  | )
|                      |          |   |             |  |       |  
|At 31 March 2005      | 42.5     |   | 9.0         |  | 51.5  |  
|                      |          |   |             |  |       |  
|Net book value:       |          |   |             |  |       |  
|                      |          |   |             |  |       |  
|At 31 March 2005      | 116.9    |   |            |  | 116.9 |  
|                      |          |   |             |  |       |  
|At 31 March 2004      | 116.1    |   |            |  | 116.1 |  
|                      |          |   |             |  |       |  

The group purchased the 14.6 per cent equity stake held by Capgemini UK PLC in its subsidiary, Vertex Data Science Limited on 5 November 2004, taking the groups shareholding to 100 per cent.
The minority interest acquired and cashflows are detailed in note 32.

13   TANGIBLE FIXED ASSETS

|                         |           |   |                |  |             |   | Fixtures,       |   | Assets in    |   |          |  
|------------------------ | --------- | - | -------------- |  | ----------- | - | --------------- | - | ------------ | - | -------- | -
|                         | Land and  |   | Infrastructure |  | Operational |   | fittings, tools |   | course of    |   |          |  
|                         | buildings |   | assets         |  | assets      |   | and equipment   |   | construction |   | Total    |  
|Group                    | £m        |   | £m             |  | £m          |   | £m              |   | £m           |   | £m       |  
|                         |           |   |                |  |             |   |                 |   |              |   |          |  
|Cost:                    |           |   |                |  |             |   |                 |   |              |   |          |  
|                         |           |   |                |  |             |   |                 |   |              |   |          |  
|At 1 April 2004          | 351.3     |   | 3,632.7        |  | 5,097.8     |   | 873.3           |   | 1,159.4      |   | 11,114.5 |  
|                         |           |   |                |  |             |   |                 |   |              |   |          |  
|Additions                | 3.0       |   | 111.3          |  | 143.0       |   | 48.4            |   | 588.6        |   | 894.3    |  
|                         |           |   |                |  |             |   |                 |   |              |   |          |  
|Grants and contributions |          |   | (11.4)         |  |            |   |                |   |             |   | (11.4)   |  
|                         |           |   |                |  |             |   |                 |   |              |   |          |  
|Transfers                | 4.9       |   | 145.7          |  | 300.9       |   | 46.5            |   | (498.0)      |   |         |  
|                         |           |   |                |  |             |   |                 |   |              |   |          |  
|Disposals                | (12.5     | ) |               |  | (65.4       | ) | (101.6          | ) | (5.0         | ) | (184.5   | )
|                         |           |   |                |  |             |   |                 |   |              |   |          |  
|At 31 March 2005         | 346.7     |   | 3,878.3        |  | 5,476.3     |   | 866.6           |   | 1,245.0      |   | 11,812.9 |  
|                         |           |   |                |  |             |   |                 |   |              |   |          |  
|Depreciation:            |           |   |                |  |             |   |                 |   |              |   |          |  
|                         |           |   |                |  |             |   |                 |   |              |   |          |  
|At 1 April 2004          | 102.2     |   | 1,229.6        |  | 1,503.9     |   | 509.4           |   |             |   | 3,345.1  |  
|                         |           |   |                |  |             |   |                 |   |              |   |          |  
|Charge for the year      | 11.7      |   | 47.1           |  | 183.3       |   | 123.8           |   |             |   | 365.9    |  
|                         |           |   |                |  |             |   |                 |   |              |   |          |  
|Disposals                | (9.6      | ) |               |  | (22.9       | ) | (100.5          | ) |             |   | (133.0   | )
|                         |           |   |                |  |             |   |                 |   |              |   |          |  
|At 31 March 2005         | 104.3     |   | 1,276.7        |  | 1,664.3     |   | 532.7           |   |             |   | 3,578.0  |  
|                         |           |   |                |  |             |   |                 |   |              |   |          |  
|Net book value:          |           |   |                |  |             |   |                 |   |              |   |          |  
|                         |           |   |                |  |             |   |                 |   |              |   |          |  
|At 31 March 2005         | 242.4     |   | 2,601.6        |  | 3,812.0     |   | 333.9           |   | 1,245.0      |   | 8,234.9  |  
|                         |           |   |                |  |             |   |                 |   |              |   |          |  
|At 31 March 2004         | 249.1     |   | 2,403.1        |  | 3,593.9     |   | 363.9           |   | 1,159.4      |   | 7,769.4  |  
|                         |           |   |                |  |             |   |                 |   |              |   |          |  

Grants and contributions received relating to infrastructure assets have been deducted from the cost of fixed assets in order to show a true and fair view (accounting policy note 1(h)). As a
consequence, the cost of fixed assets, as adjusted for any amortisation in the year, is £120.6 million (March 2004 £109.2 million) lower than it would have been had this treatment not been adopted.

|68 | United Utilities Annual Report & Accounts 2005
|-- | ----------------------------------------------

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Within tangible fixed assets are assets held under finance leases at the following amounts:

|                                        | 2005  |  | 2004  | 
|--------------------------------------- | ----- |  | ----- | 
|                                        | £m    |  | £m    | 
|                                        |       |  |       | 
|Cost:                                   |       |  |       | 
|                                        |       |  |       | 
|Operational assets                      | 81.0  |  | 132.2 | 
|                                        |       |  |       | 
|Fixtures, fittings, tools and equipment |      |  | 0.9   | 
|                                        |       |  |       | 
|At 31 March                             | 81.0  |  | 133.1 | 
|                                        |       |  |       | 
|Accumulated depreciation:               |       |  |       | 
|                                        |       |  |       | 
|Operational assets                      | 11.4  |  | 60.9  | 
|                                        |       |  |       | 
|Fixtures, fittings, tools and equipment |      |  | 0.8   | 
|                                        |       |  |       | 
|At 31 March                             | 11.4  |  | 61.7  | 
|                                        |       |  |       | 
|Net book value:                         |       |  |       | 
|                                        |       |  |       | 
|Operational assets                      | 69.6  |  | 71.3  | 
|                                        |       |  |       | 
|Fixtures, fittings, tools and equipment |      |  | 0.1   | 
|                                        |       |  |       | 
|At 31 March                             | 69.6  |  | 71.4  | 
|                                        |       |  |       | 
|                                        |       |  |       | 
|                                        | 2005  |  | 2004  | 
|                                        | £m    |  | £m    | 
|                                        |       |  |       | 
|Capital commitments:                    |       |  |       | 
|                                        |       |  |       | 
|Contracted but not provided for         | 332.0 |  | 526.4 | 
|                                        |       |  |       | 

|                                                                           | Fixtures, fittings, | 
|-------------------------------------------------------------------------- | ------------------- | 
|                                                                           | tools and equipment | 
|Company                                                                    | £m                  | 
|                                                                           |                     | 
|Cost:                                                                      |                     | 
|                                                                           |                     | 
|At 1 April 2004 and 31 March 2005                                          | 4.8                 | 
|                                                                           |                     | 
|Depreciation:                                                              |                     | 
|                                                                           |                     | 
|At 1 April 2004                                                            | 3.9                 | 
|                                                                           |                     | 
|Charge for the year                                                        | 0.1                 | 
|                                                                           |                     | 
|At 31 March 2005                                                           | 4.0                 | 
|                                                                           |                     | 
|Net book value:                                                            |                     | 
|                                                                           |                     | 
|At 31 March 2005                                                           | 0.8                 | 
|                                                                           |                     | 
|At 31 March 2004                                                           | 0.9                 | 
|                                                                           |                     | 
|                                                                           |                     | 
|The company had no capital commitments at 31 March 2005 and 31 March 2004. |                     | 
|                                                                           |                     | 

14   FIXED ASSET INVESTMENTS

|                                  |          |   |       |   |                |   | Other unlisted |   | Other listed |  |       |  
|--------------------------------- | -------- | - | ----- | - | -------------- | - | -------------- | - | ------------ |  | ----- | -
|                                  |          |   |       |   | Joint ventures |   | investments    |   | investments  |  |       |  
|                                  |          |   |       |   |                |   |                |   |              |  |       |  
|                                  | Unlisted |   | Loans |   | Total          |   |                |   |              |  | Total |  
|Group                             | £m       |   | £m    |   | £m             |   | £m             |   | £m           |  | £m    |  
|                                  |          |   |       |   |                |   |                |   |              |  |       |  
|At 1 April 2004                   | 59.4     |   | 10.6  |   | 70.0           |   | 3.0            |   |             |  | 73.0  |  
|                                  |          |   |       |   |                |   |                |   |              |  |       |  
|Additions                         |         |   | 0.6   |   | 0.6            |   | 0.3            |   |             |  | 0.9   |  
|                                  |          |   |       |   |                |   |                |   |              |  |       |  
|Share of profits                  | 11.7     |   |      |   | 11.7           |   |               |   |             |  | 11.7  |  
|                                  |          |   |       |   |                |   |                |   |              |  |       |  
|Disposals                         | (1.0     | ) |      |   | (1.0           | ) | (2.2           | ) |             |  | (3.2  | )
|                                  |          |   |       |   |                |   |                |   |              |  |       |  
|Distributions and loan repayments | (3.8     | ) | (3.4  | ) | (7.2           | ) |               |   |             |  | (7.2  | )
|                                  |          |   |       |   |                |   |                |   |              |  |       |  
|Transfers                         | (8.9     | ) |      |   | (8.9           | ) |               |   | 8.9          |  |      |  
|                                  |          |   |       |   |                |   |                |   |              |  |       |  
|Exchange adjustments              | 5.4      |   | (0.1  | ) | 5.3            |   | (0.3           | ) |             |  | 5.0   |  
|                                  |          |   |       |   |                |   |                |   |              |  |       |  
|At 31 March 2005                  | 62.8     |   | 7.7   |   | 70.5           |   | 0.8            |   | 8.9          |  | 80.2  |  
|                                  |          |   |       |   |                |   |                |   |              |  |       |  

Included within unlisted joint
ventures is total goodwill of £7.6 million, net of amortisation of £2.8 million (2004 - £8.2 million, net of amortisation of £2.1 million)
principally in respect of the groups investment in AS Tallinna Vesi.

Share of profits comprises share of
operating profits of £22.7 million, interest charge £13.2 million and taxation credit £2.2
million.

|United Utilities Annual Report & Accounts 2005 | 69
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Financial statements
  Notes to the accounts continued

|                                       | Shares
      in |  
|-------------------------------------- | --------------- | -
|                                       | subsidiary      |  
|                                       | undertakings    |  
|Company                                | £m              |  
|                                       |                 |  
|Cost:                                  |                 |  
|                                       |                 |  
|At 1 April 2004                        | 5,738.4         |  
|                                       |                 |  
|Additions                              | 295.7           |  
|                                       |                 |  
|Revaluation
      adjustment (note 25) | (1,201.0        | )
|                                       |                 |  
|At 31 March
      2005                 | 4,833.1         |  
|                                       |                 |  

Details of principal
  operating subsidiary undertakings and joint ventures, all of which are unlisted,
  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       
|                                                               |                      |                                   |                                                           
|Your Communications
      Limited                              | Ordinary             | 100%*                             | Telecommunications                                        
|                                                               |                      |                                   |                                                           
|Vertex Data
      Science Limited                              | Ordinary             | 100%                              | Business process
      outsourcing                        
|                                                               |                      |                                   |                                                           
|Vertex Customer
      Management Limited                       | Ordinary             | 100%*                             | Business process
      outsourcing                        
|                                                               |                      |                                   |                                                           
|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                                          
|                                                               |                      |                                   |                                                           
|Park Environmental
      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                      
|                                                               |                      |                                   |                                                           
|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       
|                                                               |                      |                                   |                                                           
|Australia:                                                     |                      |                                   |                                                           
|                                                               |                      |                                   |                                                           
|United Utilities
      Australia Pty Limited                   | Ordinary             | 100%*                             | Water treatment
      operations, technical and           
|                                                               |                      |                                   | management 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                          
|                                                               |                      |                                   |                                                           
|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                        
|                                                               |                      |                                   |                                                           



|70 | United Utilities Annual
      Report & Accounts 2005
|-- | ----------------------------------------------------

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|                                                     | Class
      of share | Proportion
      of share capital | Nature
      of                                   
|---------------------------------------------------- | -------------------- | --------------------------------- | --------------------------------------------------
|                                                     | capital
      held   | owned/voting
      rights         | business                                          
|                                                     |                      |                                   |                                                   
|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  
|                                                     |                      |                                   |                                                   
|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             | 37.8%*                            | 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
|                                                     |                      |                                   |                                                   
|

*Shares
  are held directly by United Utilities PLC except where marked with an asterisk
  where they are held by subsidiary undertakings.

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

|15 | STOCKS
|-- | ------

|                                       |       |  |      | 
|-------------------------------------- | ----- |  | ---- | 
|                                       | Group | 
|                                       |       |  |      | 
|                                       | 2005  |  | 2004 | 
|                                       | £m    |  | £m   | 
|                                       |       |  |      | 
|Raw materials
      and finished goods | 9.2   |  | 9.1  | 
|                                       |       |  |      | 
|Work in progress                       | 9.9   |  | 8.0  | 
|                                       |       |  |      | 
|                                       | 19.1  |  | 17.1 | 
|                                       |       |  |      | 
|                                       |       |  |      | 

|16 | DEBTORS
|-- | -------

|                                                                                                                                      |        |   |         |   |         |  |         | 
|------------------------------------------------------------------------------------------------------------------------------------- | ------ | - | ------- | - | ------- |  | ------- | 
|                                                                                                                                      | Group  |   | Company |  
|                                                                                                                                      |        |   |         |   |         |  |         | 
|                                                                                                                                      | 2005   |   | 2004    |   | 2005    |  | 2004    | 
|                                                                                                                                      | £m     |   | £m      |   | £m      |  | £m      | 
|                                                                                                                                      |        |   |         |   |         |  |         | 
|Amounts falling
      due within one year:                                                                                            |        |   |         |   |         |  |         | 
|                                                                                                                                      |        |   |         |   |         |  |         | 
|Trade debtors                                                                                                                         | 320.4  |   | 317.4   |   |        |  |        | 
|                                                                                                                                      |        |   |         |   |         |  |         | 
|Provisions for
      doubtful debts                                                                                                   | (127.2 | ) | (107.8  | ) |        |  |        | 
|                                                                                                                                      |        |   |         |   |         |  |         | 
|                                                                                                                                      | 193.2  |   | 209.6   |   |        |  |        | 
|                                                                                                                                      |        |   |         |   |         |  |         | 
|Amounts owed
      by subsidiary undertakings                                                                                         |       |   |        |   | 1,431.9 |  | 1,363.1 | 
|                                                                                                                                      |        |   |         |   |         |  |         | 
|Other debtors                                                                                                                         | 5.4    |   | 14.7    |   | 1.6     |  | 0.2     | 
|                                                                                                                                      |        |   |         |   |         |  |         | 
|Prepayments
      and accrued income                                                                                                  | 576.3  |   | 269.6   |   | 8.8     |  | 0.3     | 
|                                                                                                                                      |        |   |         |   |         |  |         | 
|                                                                                                                                      | 774.9  |   | 493.9   |   | 1,442.3 |  | 1,363.6 | 
|                                                                                                                                      |        |   |         |   |         |  |         | 
|Within
      prepayments and accrued income is £402.4 million, which falls due
      after more than one year (2004  £98.2 million). |        |   |         |   |        
|                                                                                                                                      |        |   |         |   |        

|17 | CURRENT ASSET
      INVESTMENTS
|-- | -------------------------------

|                                               |       |  |         |  |       |  |       | 
|---------------------------------------------- | ----- |  | ------- |  | ----- |  | ----- | 
|                                               | Group |  | Company | 
|                                               |       |  |         |  |       |  |       | 
|                                               | 2005  |  | 2004    |  | 2005  |  | 2004  | 
|                                               | £m    |  | £m      |  | £m    |  | £m    | 
|                                               |       |  |         |  |       |  |       | 
|Managed funds
      and short-term investments | 812.3 |  | 989.2   |  | 319.3 |  | 637.5 | 
|                                               |       |  |         |  |       |  |       | 
|Other current
      asset investments          | 21.0  |  | 18.6    |  |      |  |      | 
|                                               |       |  |         |  |       |  |       | 
|                                               | 833.3 |  | 1,007.8 |  | 319.3 |  | 637.5 | 
|                                               |       |  |         |  |       |  |       | 



|United Utilities Annual
      Report & Accounts 2005 | 71
|---------------------------------------------------- | --

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Financial statements
  Notes to the accounts continued

|18 | CREDITORS: AMOUNTS FALLING
      DUE WITHIN ONE YEAR
|-- | ----------------------------------------------------

|                                               |         |  |         |  |         |  |         | 
|---------------------------------------------- | ------- |  | ------- |  | ------- |  | ------- | 
|                                               | Group   |  | Company | 
|                                               |         |  |         |  |         |  |         | 
|                                               | 2005    |  | 2004    |  | 2005    |  | 2004    | 
|                                               | £m      |  | £m      |  | £m      |  | £m      | 
|                                               |         |  |         |  |         |  |         | 
|Loans                                          | 467.3   |  | 49.7    |  | 212.1   |  |        | 
|                                               |         |  |         |  |         |  |         | 
|Bank overdrafts
      and temporary borrowings | 37.1    |  | 32.6    |  |        |  | 7.4     | 
|                                               |         |  |         |  |         |  |         | 
|Obligations
      under finance leases         | 0.8     |  |        |  |        |  |        | 
|                                               |         |  |         |  |         |  |         | 
|Trade creditors                                | 54.7    |  | 72.6    |  |        |  |        | 
|                                               |         |  |         |  |         |  |         | 
|Amounts owed
      to subsidiary undertakings  |        |  |        |  | 898.0   |  | 859.6   | 
|                                               |         |  |         |  |         |  |         | 
|Dividends                                      | 221.0   |  | 213.8   |  | 221.0   |  | 213.8   | 
|                                               |         |  |         |  |         |  |         | 
|Corporation
      taxation                     | 94.4    |  | 123.0   |  |        |  |        | 
|                                               |         |  |         |  |         |  |         | 
|Other taxation
      and social security       | 11.5    |  | 10.3    |  | 0.4     |  | 10.5    | 
|                                               |         |  |         |  |         |  |         | 
|Accruals and
      deferred income             | 869.8   |  | 872.8   |  | 56.4    |  | 48.9    | 
|                                               |         |  |         |  |         |  |         | 
|                                               | 1,756.6 |  | 1,374.8 |  | 1,387.9 |  | 1,140.2 | 
|                                               |         |  |         |  |         |  |         | 
|                                               |         |  |         |  |         |  |         | 

|19 | CREDITORS: AMOUNTS
      FALLING DUE AFTER MORE THAN ONE YEAR
|-- | -------------------------------------------------------------

|                                                  |         |  |         |  |       |  |         | 
|------------------------------------------------- | ------- |  | ------- |  | ----- |  | ------- | 
|                                                  |         |  | Group   |  |       |  | Company | 
|                                                  |         |  |         |  |       |  |         | 
|                                                  | 2005    |  | 2004    |  | 2005  |  | 2004    | 
|                                                  | £m      |  | £m      |  | £m    |  | £m      | 
|                                                  |         |  |         |  |       |  |         | 
|Loans                                             | 4,417.0 |  | 4,306.3 |  | 914.9 |  | 1,120.6 | 
|                                                  |         |  |         |  |       |  |         | 
|Obligations
      under finance leases            | 80.2    |  | 81.1    |  |      |  |        | 
|                                                  |         |  |         |  |       |  |         | 
|Other creditors                                   | 21.3    |  | 16.5    |  |      |  |        | 
|                                                  |         |  |         |  |       |  |         | 
|Deferred grants
      and contributions (note 20) | 302.0   |  | 298.1   |  |      |  |        | 
|                                                  |         |  |         |  |       |  |         | 
|                                                  | 4,820.5 |  | 4,702.0 |  | 914.9 |  | 1,120.6 | 
|                                                  |         |  |         |  |       |  |         | 
|                                                  |         |  |         |  |       |  |         | 

|20 | DEFERRED GRANTS
      AND CONTRIBUTIONS
|-- | ---------------------------------------

|                                                     |       |  
|---------------------------------------------------- | ----- | -
|                                                     | Group |  
|                                                     |       |  
|                                                     | £m    |  
|                                                     |       |  
|At 1 April 2004                                      | 298.1 |  
|                                                     |       |  
|Received in
      the year                           | 14.4  |  
|                                                     |       |  
|Credit to profit
      and loss account for the year | (10.5 | )
|                                                     |       |  
|At 31 March
      2005                               | 302.0 |  
|                                                     |       |  
|                                                     |       |  
|

|21 | PROVISIONS FOR
      LIABILITIES AND CHARGES
|-- | --------------------------------------------



|                                      |                    |   |               |   |       |   |       |   |               | 
|------------------------------------- | ------------------ | - | ------------- | - | ----- | - | ----- | - | ------------- | 
|                                      |                    |   |               |   |       |   | Group |   | Company       | 
|                                      |                    |   |               |   |       |   |       |   |               | 
|                                      | Deferred
      tax |   |               |   |       |   |       |   |               | 
|                                      | (note
      22)    |   | Restructuring |   | Other |   | Total |   | Restructuring | 
|                                      | £m                 |   | £m            |   | £m    |   | £m    |   | £m            | 
|                                      |                    |   |               |   |       |   |       |   |               | 
|At 1 April 2004                       | 331.4              |   | 5.9           |   | 2.4   |   | 339.7 |   |              | 
|                                      |                    |   |               |   |       |   |       |   |               | 
|Arising on disposal
      of business | (3.4               | ) |              |   |      |   | (3.4  | ) |              | 
|                                      |                    |   |               |   |       |   |       |   |               | 
|Utilised                              |                   |   | (20.4         | ) | (0.3  | ) | (20.7 | ) |              | 
|                                      |                    |   |               |   |       |   |       |   |               | 
|Profit and loss
      account         | 67.2               |   | 29.7          |   |      |   | 96.9  |   | 0.4           | 
|                                      |                    |   |               |   |       |   |       |   |               | 
|At 31 March
      2005                | 395.2              |   | 15.2          |   | 2.1   |   | 412.5 |   | 0.4           | 
|                                      |                    |   |               |   |       |   |       |   |               | 

The majority of
  restructuring provisions are for costs of restructuring in licensed multi-utility
  operations and business process outsourcing, which are expected to be utilised
  within the following 12 months.

|22 | DEFERRED TAX
|-- | ------------

|                                              |         |   |         |  
|--------------------------------------------- | ------- | - | ------- | -
|                                              | Group   |  
|                                              |         |   |         |  
|                                              | 2005    |   | 2004    |  
|                                              | £m      |   | £m      |  
|                                              |         |   |         |  
|Accelerated
      capital allowances          | 1,456.5 |   | 1,333.9 |  
|                                              |         |   |         |  
|Short-term timing
      differences           | (109.3  | ) | (116.1  | )
|                                              |         |   |         |  
|Undiscounted
      provision for deferred tax | 1,347.2 |   | 1,217.8 |  
|                                              |         |   |         |  
|Discount                                      | (952.0  | ) | (886.4  | )
|                                              |         |   |         |  
|Discounted provision
      for deferred tax   | 395.2   |   | 331.4   |  
|                                              |         |   |         |  



|72 | United Utilities Annual
      Report & Accounts 2005
|-- | ----------------------------------------------------

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|23                                                                                                                                                                                | BORROWINGS
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------
|Below
      is an analysis of gross debt which, after taking into account cash and short-term
      investments of £861.3 million, reduces to net debt of £4,141.1
      million.

|                                         |      |   |         | 
|---------------------------------------- | ---- | - | ------- | 
|2005                                     | 2004
|£m                                       | £m  
|                                         |      |   |         | 
|Bank overdrafts and temporary borrowings |      |   |         | 
|                                         |      |   |         | 
|Term loans                               |      |   |         | 
|                                         |      |   |         | 
|Finance leases                           |      |   |         | 
|                                         |      |   |         | 
|                                         |      |   |         | 
|                                         |      |   |         | 
|                                         |      |   |         | 
|                                         |      |   | 2005    | 
|Repayments fall due as follows:          | Year |   | £m      | 
|                                         |      |   |         | 
|After five years                         | 2011 | + | 2,594.7 | 
|                                         |      |   |         | 
|From four to five years                  | 2010 |   | 169.2   | 
|                                         |      |   |         | 
|From three to four years                 | 2009 |   | 734.0   | 
|                                         |      |   |         | 
|From two to three years                  | 2008 |   | 934.1   | 
|                                         |      |   |         | 
|From one to two years                    | 2007 |   | 65.2    | 
|                                         |      |   |         | 
|After more than one year                 |      |   | 4,497.2 | 
|                                         |      |   |         | 
|Within one year                          | 2006 |   | 505.2   | 
|                                         |      |   |         | 
|                                         |      |   | 5,002.4 | 
|                                         |      |   |         | 

Bank overdrafts and temporary borrowingsThe
        bank overdrafts and temporary borrowings are repayable in less than one
        year. The weighted average rate of
interest on bank overdrafts and temporary borrowings was 5.16 per cent (2004  3.87
per cent). The group had available committed bank facilities of £875.0 million (2004  £775.0 million) of which £873.4 million was unutilised at 31 March 2005 (2004  £773.1 million). Of the amounts unutilised,
£100.0 million expire within one year, £323.4 million expire after one year but in less than two years, and the remaining £450.0
million expire in more than two years.

Term loansAmounts
repayable after more than five years comprise loans repayable between 2011 and
2053. Interest rates range
from 1.135 per cent to 14.83 per cent on £2,252.1 million (2004 
£1,852.9 million) and are at floating rates on £342.6 million (2004  £361.5
million).

Finance LeasesAn analysis of finance lease repayments is given in note 27.

On total borrowings, interest rates
range from 0.705 per cent to 14.83 per cent on £4,455.7 million and are at floating rates on £546.7
million.

The analysis of net debt
prior to the effect of derivative instruments is as follows:

|                           | Borrowings at
      31 March |     
|-------------------------- | ---------------------------- | ----
|                          
|2005                       |                              | 2004
|£m                         | £m                          
|                           |                              |     
|Fixed rate borrowings:     |                              |     
|                           |                              |     
|Sterling                   | 1,772.5                      |     
|                           |                              |     
|United States dollars*     | 1,091.9                      |     
|                           |                              |     
|Euros*                     | 1,470.6                      |     
|                           |                              |     
|Japanese yen*              | 120.7                        |     
|                           |                              |     
|                           | 4,455.7                      |     
|                           |                              |     
|Floating rate borrowings:  |                              |     
|                           |                              |     
|Sterling                   | 510.0                        |     
|                           |                              |     
|Japanese yen*              | 12.3                         |     
|                           |                              |     
|United States dollars*     | 11.9                         |     
|                           |                              |     
|Hong Kong dollars*         | 12.5                         |     
|                           |                              |     
|                           | 546.7                        |     
|                           |                              |     
|Floating rate investments: |                              |     
|                           |                              |     
|Sterling (including cash)  | (861.3                       | )   
|                           |                              |     
|Net debt at 31 March       | 4,141.1                      |     
|                           |                              |     

*Currency items are recorded in the balance sheet at the hedged rate.

Included in the above table is a loan
with Japanese yen principal paying a United States dollar coupon. Included in
fixed rate borrowings is a loan of £50.0 million for which the principal
and
interest are linked to the Retail Price Index.

The fair values of the groups
financial instruments are shown on page 75.

|                                                     |   
|---------------------------------------------------- | --
|United Utilities Annual
      Report & Accounts 2005 | 73

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Financial statements******Notes
to the accounts continued**



Taking into account derivative instruments, net debt can be analysed as follows:

|                                |                            |                              |                        |       | Weighted
      average |      | Weighted
      average
|------------------------------- | -------------------------- | ---------------------------- | ---------------------- | ----- | ---------------------- | ---- | ----------------------
|                                |                            | interest
      rate at which | period
      for which
|Borrowings
      at 31 March    | borrowings
      are fixed | interest
      is fixed     
|                                |                            |                             
|2005                            |                            | 2004                         | 2005                   | 2004  | 2005                   | 2004
|£m                              | £m                         | %                            | %                      | Years | Years                 
|                                |                            |                              |                        |       |                        |      |                       
|Fixed rate borrowings:          |                            |                              |                        |       |                        |      |                       
|                                |                            |                              |                        |       |                        |      |                       
|Sterling                        | 4,435.8                    |                              | 3,190.0                |       | 6.2                    | 7.3  |                       
|                                |                            |                              |                        |       |                        |      |                       
|Floating rate borrowings:       |                            |                              |                        |       |                        |      |                       
|                                |                            |                              |                        |       |                        |      |                       
|Sterling                        | 566.6                      |                              | 1,279.7                |       |                        |      |                       
|                                |                            |                              |                        |       |                        |      |                       
|Floating rate investments:      |                            |                              |                        |       |                        |      |                       
|                                |                            |                              |                        |       |                        |      |                       
|Sterling (including
      cash) | (861.3                     | )                            | (1,031.3               | )     |                        |      |                       
|                                |                            |                              |                        |       |                        |      |                       
|Net debt at 31 March            | 4,141.1                    |                              | 3,438.4                |       |                        |      |                       
|                                |                            |                              |                        |       |                        |      |                       

Floating interest rates are based on LIBOR.

CompanyExcluding amounts owed
  to subsidiary undertakings, the company has borrowings totalling £1,127.0
  million (2004  £1,128.0 million), of which£212.1
  million falls due within one year, repayable in August 2005 with interest charged
  at 6.25 per cent. The remaining loans totalling £914.9 million have maturities
  and interest rates as follows:

£16.5 million
  maturing in February 2008 has interest charged at 0.705 per cent; £311.6
  million maturing in the year ending 2009 has 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 has interest charged at 3.875 per cent; £338.7 million
  maturing in the year ending 2019 has interest rates of 5.375 per cent on £189.9
  million and 4.55 per cent on £148.8 million; £242.4 million is repayable
  in the year ending 2029 with interest charged at 6.875 per cent.

|24                                                                                                        | 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 group uses a
  variety of financial instruments, including derivatives, to raise finance for
  its operations and to manage the risks arising from those operations.

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. The effect of the
  use of derivatives is illustrated in note 23.

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.

All transactions are undertaken to manage the risks arising from underlying business activities and no speculative trading is undertaken. The counterparties to these instruments generally 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.

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 that of the country in which they operate. 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.

|   |                                                     
|-- | ----------------------------------------------------
|74 | United Utilities Annual
      Report & Accounts 2005

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Fair values of financial
  instrumentsFair value
  estimates are made at a specific point in time, based on relevant market information
  and information about the financial instrument. These estimates are subjective
  in nature and involve uncertainties and matters of significant judgement and
  therefore cannot be determined precisely. Changes in assumptions could significantly
  affect the estimates.

|                                                            |         |  | 2005    |  |         |  | 2004    |  
|----------------------------------------------------------- | ------- |  | ------- |  | ------- |  | ------- | -
|                                                            |         |  |         | 
|                                                            | Book    |  | Fair    |  | Book    |  | Fair    |  
|                                                            | value   |  | value   |  | value   |  | value   |  
|At 31 March                                                 | £m      |  | £m      |  | £m      |  | £m      |  
|                                                            |         |  |         |  |        
|Short-term debt and
      current portion of long-term debt | 505.2   |  | 505.2   |  | 82.3    |  | 82.3    |  
|                                                            |         |  |         |  |         |  |         |  
|Long-term debt                                              | 4,497.2 |  | 4,615.0 |  | 4,387.4 |  | 4,599.8 |  
|                                                            |         |  |         |  |         |  |         |  
|                                                            | 5,002.4 |  | 5,120.2 |  | 4,469.7 |  | 4,682.1 |  
|                                                            |         |  |         |  |         |  |         |  
|Interest rate swaps                                         |        |  | 47.3    |  |        |  | 43.7    |  
|                                                            |         |  |         |  |         |  |         |  
|Foreign exchange contracts
      and currency swaps         |        |  | 8.2     |  |        |  | (99.8   | )
|                                                            |         |  |         |  |         |  |         |  
|Total borrowings                                            | 5,002.4 |  | 5,175.7 |  | 4,469.7 |  | 4,626.0 |  
|                                                            |         |  |         |  |         |  |         |  

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

Long-term investmentsThe fair value of
  investments for which there are no quoted market prices, approximate to their
  carrying value of £71.3 million. The fair value of the groups listed
  investment in Manila Water Company Inc is £8.9 million based upon its
  closing share price at 31 March 2005.

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.

Long-term receivables
  and liabilitiesThe fair values of
  financial instruments included within long-term receivables and liabilities
  (excluding borrowings) are based on discounted cash flows using appropriate
  market interest rates.

Net 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 quoted long-term borrowings and guaranteed preferred
  securities is based on year end mid-market quoted prices. The fair value of
  other long-term borrowings is estimated by discounting the future cash flows
  to net present values using appropriate market interest rates prevailing at
  the year end.

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 carrying value of debt is shown
in the balance sheet at the hedged rate. The impact of the hedged currency rates
as opposed to translation at year end exchange rates is £(68.1) million
(2004: £(25.4) million).

The fair value of these financial instruments is estimated by discounting the future cash flows to net present values using appropriate market interest rates prevailing at the year end. The fair
values of currency and interest rate swaps excludes the related accrued interest receivables and payables.

HedgesUnrecognised gains
  and losses on financial assets and liabilities for which hedge accounting has
  been used at the balance sheet date were £152.4 million and £207.9
  million respectively (2004  £192.0 million and £135.9 million).

The group anticipates that £83.5 million of these gains and £72.2 million of these losses will be realised in the forthcoming financial year. 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.

|                                                     |   
|---------------------------------------------------- | --
|United
      Utilities Annual Report & Accounts 2005 | 75

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Financial statementsNotes to the
  accounts continued

25CAPITAL
  AND RESERVESThe movements
  in shareholders equity are as follows:

|                                                    | Group
      and company |  |         |  | Group    |   |         |   |          |   | Company  |  
|--------------------------------------------------- | ----------------------- |  | ------- |  | -------- | - | ------- | - | -------- | - | -------- | -
|                                                    |                         |  |         |  |          |  
|                                                    | Called
      up         |  | Share   |  | Profit   |   |         |   | Profit   |   |          |  
|                                                    | share                   |  | premium |  | and loss |   |         |   | and loss |   | Other    |  
|                                                    | capital                 |  | account |  | account  |   | Total   |   | account  |   | reserves |  
|                                                    | £m                      |  | £m      |  | £m       |   | £m      |   | £m       |   | £m       |  
|                                                    |                         |  |         |  |          |   |         |   |          |   |          |  
|At 31 March 2002                                    | 555.9                   |  | 671.6   |  | 1,291.7  |   | 2,519.2 |   | 910.9    |   | 2,544.8  |  
|                                                    |                         |  |         |  |          |   |         |   |          |   |          |  
|Profit for financial
      year                     |                        |  |        |  | 277.8    |   | 277.8   |   | 601.8    |   |         |  
|                                                    |                         |  |         |  |          |   |         |   |          |   |          |  
|Dividends on ordinary
      shares                  |                        |  |        |  | (264.8   | ) | (264.8  | ) | (264.8   | ) |         |  
|                                                    |                         |  |         |  |          |   |         |   |          |   |          |  
|Shares issued net of
      costs                    | 0.6                     |  | 2.7     |  |         |   | 3.3     |   |         |   |         |  
|                                                    |                         |  |         |  |          |   |         |   |          |   |          |  
|Goodwill written back
      on the sale of US Water |                        |  |        |  | 0.9      |   | 0.9     |   |         |   |         |  
|                                                    |                         |  |         |  |          |   |         |   |          |   |          |  
|Currency translation
      adjustment on equity     |                         |  |         |  |          |   |         |   |          |   |          |  
|investment in Argentina                             |                        |  |        |  | (6.8     | ) | (6.8    | ) |         |   |         |  
|                                                    |                         |  |         |  |          |   |         |   |          |   |          |  
|Exchange adjustments                                |                        |  |        |  | 4.0      |   | 4.0     |   |         |   |         |  
|                                                    |                         |  |         |  |          |   |         |   |          |   |          |  
|At 31 March 2003                                    | 556.5                   |  | 674.3   |  | 1,302.8  |   | 2,533.6 |   | 1,247.9  |   | 2,544.8  |  
|                                                    |                         |  |         |  |          |   |         |   |          |   |          |  
|Profit for financial
      year                     |                        |  |        |  | 361.0    |   | 361.0   |   | 269.6    |   |         |  
|                                                    |                         |  |         |  |          |   |         |   |          |   |          |  
|Dividends on ordinary
      shares                  |                        |  |        |  | (315.3   | ) | (315.3  | ) | (315.3   | ) |         |  
|                                                    |                         |  |         |  |          |   |         |   |          |   |          |  
|Shares issued net of
      costs                    | 155.3                   |  | 348.8   |  |         |   | 504.1   |   |         |   |         |  
|                                                    |                         |  |         |  |          |   |         |   |          |   |          |  
|Own shares held in ESOP                             |                        |  |        |  | (2.3     | ) | (2.3    | ) | (2.3     | ) |         |  
|                                                    |                         |  |         |  |          |   |         |   |          |   |          |  
|Exchange adjustments                                |                        |  |        |  | 2.2      |   | 2.2     |   |         |   |         |  
|                                                    |                         |  |         |  |          |   |         |   |          |   |          |  
|At 31 March 2004                                    | 711.8                   |  | 1,023.1 |  | 1,348.4  |   | 3,083.3 |   | 1,199.9  |   | 2,544.8  |  
|                                                    |                         |  |         |  |          |   |         |   |          |   |          |  
|Profit for financial
      year                     |                        |  |        |  | 333.1    |   | 333.1   |   | 316.4    |   |         |  
|                                                    |                         |  |         |  |          |   |         |   |          |   |          |  
|Dividends on ordinary
      shares                  |                        |  |        |  | (324.7   | ) | (324.7  | ) | (324.7   | ) |         |  
|                                                    |                         |  |         |  |          |   |         |   |          |   |          |  
|Shares issued net of
      costs                    | 4.4                     |  | 15.6    |  |         |   | 20.0    |   |         |   |         |  
|                                                    |                         |  |         |  |          |   |         |   |          |   |          |  
|Own shares released
      from ESOP                 |                        |  |        |  | 2.0      |   | 2.0     |   | 2.0      |   |         |  
|                                                    |                         |  |         |  |          |   |         |   |          |   |          |  
|Revaluation adjustment                              |                        |  |        |  |         |   |        |   |         |   | (1,201.0 | )
|                                                    |                         |  |         |  |          |   |         |   |          |   |          |  
|Exchange adjustments                                |                        |  |        |  | 3.7      |   | 3.7     |   |         |   |         |  
|                                                    |                         |  |         |  |          |   |         |   |          |   |          |  
|At 31 March 2005                                    | 716.2                   |  | 1,038.7 |  | 1,362.5  |   | 3,117.4 |   | 1,193.6  |   | 1,343.8  |  
|                                                    |                         |  |         |  |          |   |         |   |          |   |          |  

As allowed by section 230(4) of the Companies Act 1985, the company has not presented its own profit and loss account. The amount of group profit for the financial year dealt with in the
companys profit and loss account is £316.4 million (2004  £269.6 million; 2003  £601.8 million) after accounting for dividends receivable from subsidiary undertakings of £323.2 million (2004 
£282.0 million; 2003  £958.6 million).

The cumulative amount
  of goodwill included in reserves resulting from acquisitions, before FRS 10
  became effective, net of goodwill attributable to subsidiaries or businesses
  demerged or disposed of prior to 31 March 2005, amounts to £1,023.0 million
  (2004  £1,023.0 million; 2003  £1,023.0 million). Consolidated
  retained earnings at 31 March 2005 include retained losses of joint ventures
  and associated undertakings of £0.1 million (2004  £11.8 million;
  2003  £12.5 million). The cumulative amount of exchange adjustments
  included within consolidated retained earnings is £(1.4) million (2004
   £(5.1) million; 2003  £(7.3) million).

On 31 March 2005 the directors
  revalued the companys investment in one of its subsidiaries and made an
  adjustment in value of £1,201.0 million against the value of that asset.
  The directors have considered the value of the companys other fixed assets
  at the same time and are satisfied that the aggregate value of those fixed assets
  was not less than the aggregate amount at which they are stated in the companys
  accounts. Consequently, in accordance with section 275 of the Companies Act
  1985, the adjustment in carrying value is not classified as a realised loss.
  Accordingly the non-distributable other reserve of the company is adjusted to
  reflect this valuation and is stated in the accounts on the basis that the revaluation
  of the companys fixed assets took place at that time.

Apart from dividends from
  United Utilities Water PLC and United Utilities Electricity PLC, which are subject
  to certain regulatory restrictions, there are no significant statutory or contractual
  restrictions on the distribution of current profits of subsidiary or joint venture
  undertakings; undistributed profits of prior years are, in the main, permanently
  employed in the businesses of these undertakings. The undistributed profits
  of group undertakings overseas may be liable to overseas taxes and/or UK taxation
  (after allowing for double taxation relief) if they were to be distributed as
  dividends. No provision has been made in respect of potential taxation liabilities
  on realisation of assets at restated or revalued amounts or on realisation of
  joint venture undertakings at equity accounted value.

The authorised ordinary
  share capital of the company was 800,000,000 ordinary shares of £1 each
  at 31 March 2005 (2004  800,000,000; 2003 800,000,000). The allotted
  and fully paid ordinary share capital of the company at 31 March 2005 was 561,572,377
  ordinary shares (2004  557,125,006; 2003  556,526,651). 4,447,371
  ordinary shares were allotted during the year ended 31 March 2005 (2004 
  598,355; 2003  584,313) 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 £20.0 million (2004  £2.9 million;
  2003  £3.3 million).

|76 | United Utilities Annual
      Report & Accounts 2005
|-- | ----------------------------------------------------

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The five for nine rights
  issue, structured so that the proceeds are received in two stages, was approved
  at the extraordinary general meeting (EGM) of shareholders on 26 August 2003.
  The authorised A share capital of the company was 638,000,000 A shares of 50
  pence each. The allotted and fully paid A share capital of the company at 31
  March 2005 was 309,286,997 A shares (2004  309,286,997 ; 2003  nil).
  The first tranche of the proceeds, received during September 2003, raised £501.2
  million (net of costs) from the issuing of those shares. The second tranche
  of proceeds are due to be received in June 2005, reflecting the subscription
  for further A shares. All A shares will then be consolidated and reclassified
  as ordinary shares on the basis of one ordinary share for two A shares.

Since 31 March 2005, 423,593
  ordinary shares have been allotted on the exercise of options and at 1 June
  2005, the companys issued ordinary share capital, credited as fully paid,
  was 561,995,970 and A share capital, credited as fully paid, was 309,286,997.

The employee Sharesave
  scheme is available to all eligible employees and the 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). The Sharesave scheme 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. 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. Options outstanding under the share option
  schemes at 31 March, together with their exercise prices and dates, were:

|                                       |            |            | Exercise  |  | Normal
      dates
|-------------------------------------- | ---------- | ---------- | --------- |  | ------------------
|                                       | 2005       | 2004       | price(4)  |  | of exercise       
|                                       |            |            |           |  |                   
|Employee Sharesave scheme              |           | 292,102    | 611.7p(1) |  | 2002
      or 2004
|                                       |            |            |           |  |                   
|                                       | 220,027    | 2,505,354  | 407.7p(1) |  | 2003 or
      2005
|                                       |            |            |           |  |                   
|                                       | 730,638    | 1,259,381  | 481.2p(1) |  | 2004 or
      2006
|                                       |            |            |           |  |                   
|                                       | 1,132,775  | 1,865,490  | 432.3p(1) |  | 2005 or
      2007
|                                       |            |            |           |  |                   
|                                       | 1,964,708  | 2,091,625  | 423.7p(1) |  | 2006 or
      2008
|                                       |            |            |           |  |                   
|                                       | 2,110,789  | 2,268,159  | 396.0p(1) |  | 2007              
|                                       |            |            |           |  |                   
|Executive share option
      scheme    |           | 44,002     | 458.4p(3) |  | 1997 to
      2004
|                                       |            |            |           |  |                   
|                                       |           | 22,821     | 389.8p(2) |  | 1999 to
      2004
|                                       |            |            |           |  |                   
|                                       |           | 16,781     | 414.9p(3) |  | 1997 to
      2004
|                                       |            |            |           |  |                   
|                                       |           | 19,985     | 353.0p(2) |  | 1999 to
      2004
|                                       |            |            |           |  |                   
|                                       |           | 61,040     | 487.6p(3) |  | 1998 to
      2005
|                                       |            |            |           |  |                   
|                                       |           | 16,878     | 414.9p(2) |  | 2000 to
      2005
|                                       |            |            |           |  |                   
|                                       | 55,791     | 148,977    | 505.4p(3) |  | 1998 to
      2005
|                                       |            |            |           |  |                   
|                                       | 68,361     | 160,549    | 470.8p(3) |  | 1999 to
      2006
|                                       |            |            |           |  |                   
|                                       | 145,412    | 266,891    | 543.0p(3) |  | 2000 to
      2007
|                                       |            |            |           |  |                   
|                                       | 90,496     | 132,126    | 546.4p(3) |  | 2000 to
      2007
|                                       |            |            |           |  |                   
|                                       | 333,309    | 399,785    | 664.5p(3) |  | 2000 to
      2007
|                                       |            |            |           |  |                   
|                                       | 128,947    | 131,549    | 766.0p(3) |  | 2001 to
      2008
|                                       |            |            |           |  |                   
|                                       | 180,365    | 201,501    | 750.5p(3) |  | 2001 to
      2008
|                                       |            |            |           |  |                   
|                                       | 685,349    | 809,331    | 664.0p(3) |  | 2002 to
      2009
|                                       |            |            |           |  |                   
|Company share option
      scheme 1999 | 162,868    | 308,935    | 532.2p(3) |  | 2002 to
      2009
|                                       |            |            |           |  |                   
|                                       | 633,714    | 1,114,733  | 587.9p(3) |  | 2003 to
      2010
|                                       |            |            |           |  |                   
|                                       | 303,336    | 521,770    | 575.8p(3) |  | 2003 to
      2010
|                                       |            |            |           |  |                   
|                                       | 682,259    | 1,073,907  | 563.7p(3) |  | 2004 to
      2011
|                                       |            |            |           |  |                   
|                                       | 389,742    | 617,802    | 509.3p(3) |  | 2005 to
      2012
|                                       |            |            |           |  |                   
|                                       | 1,382,215  | 1,462,552  | 528.3p(3) |  | 2005 to
      2012
|                                       |            |            |           |  |                   
|                                       | 755,027    | 821,016    | 544.7p(3) |  | 2005 to
      2012
|                                       |            |            |           |  |                   
|                                       | 12,156,128 | 18,635,042 |           |  |                   
|                                       |            |            |           |  |                   

|(1) | The exercise
      price represents 80 per cent of the market price as at the date the option
      was granted.
|--- | ----------------------------------------------------------------------------------------------------------------
|    |                                                                                                                 
|(2) | The exercise
      price represents 85 per cent of the market price as at the date the option
      was granted.
|    |                                                                                                                 
|(3) | The exercise
      price equalled the market price at the date the option was granted.                          



|United Utilities Annual
      Report & Accounts 2005 | 77
|---------------------------------------------------- | --

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Financial statementsNotes to the accounts
  continued

An opportunity to join the
  employee Sharesave scheme was offered during the years ended 31 March 2004 and
  31 March 2003, and options were also granted under the company share option
  scheme 1999. In the year ended 31 March 2005, options were granted under the
  option schemes in respect of a total of nil ordinary shares (2004  2,311,435
  ordinary shares; 2003  4,016,642 ordinary shares), options for 4,361,127
  ordinary shares (2004  521,504 ordinary shares; 2003  1,447,851
  ordinary shares) were exercised and options for 1,261,467 ordinary shares (2004
   2,466,866 ordinary shares; 2003 349,451 ordinary shares) lapsed
  or were cancelled.

United Utilities established
  a Qualifying Employee Share Ownership Trust (QUEST) in 1998, an employee benefit
  trust complying with requirements of the Finance Act 1989. The QUEST trustee
  assumed the obligation to satisfy options granted under the existing United
  Utilities Sharesave scheme. As a result of changes in the tax regime, shares
  have been allotted directly to Sharesave participants since 1 April 2003 and
  arrangements are now being made to wind up the QUEST. There were no shares held
  in the QUEST at 31 March 2005.

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 2005, 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.

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.

26   PENSIONSThe 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.

For UUPS and ESPS, the
  pension cost and asset under the accounting standard SSAP 24 have been assessed
  in accordance with the advice of a firm of actuaries, Mercer Human Resource
  Consulting, using the projected unit method. For this purpose, the actuarial
  assumptions adopted are based upon investment growth of 7.6 per cent per annum
  pre retirement and 5.6 per cent per annum post retirement; pay growth of 4.1
  per cent per annum for UUPS and 4.3 per cent per annum for ESPS and increases
  to pensions in payment and deferred pensions of 2.8 per cent per annum. The
  actuarial value of the assets was taken as the market value of the assets.

The last actuarial valuations
  of the Schemes were carried out as at 31 March 2004. The combined market value
  of the groups share of the assets of the Schemes at the valuation date
  was £1,839.9 million. Using the assumptions adopted for SSAP 24, the combined
  actuarial value of the assets represented 97 per cent of the value of the accrued
  benefits, after allowing for expected future earnings increases. In deriving
  the pension cost under SSAP 24, the deficit in the Schemes Is being spread over
  the future working lifetime of the existing members.

For UUPS, the employers
  contributions have been assessed in accordance with the advice of Mercer Human
  Resource Consulting using different assumptions to those described above. For
  ESPS, the employers contributions have been assessed in accordance with
  the advice of a firm of actuaries, Hewitt Bacon and Woodrow, using different
  assumptions and methods to those described above.

During the year ended
  31 March 2005, the group contributed to UUPS at rates which ranged from 16.1
  per cent to 30.3 per cent of pensionable salaries dependent upon benefit category.
  In addition, further contributions were made to cover the cost of additional
  severance benefits granted. During the year ended 31 March 2005, the group contributed
  to ESPS at a rate of 19.0 per cent of pensionable salaries.

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 SSAP 24 and the assumptions set out above.
  In accordance with these unfunded arrangements, the group has made payments
  to former directors, including lump sum payments, of £370,510 in total
  in the year ended 31 March 2005 (2004  £298,556; 2003  £207,387).

The total pension cost
  for the period was £69.4 million, of which £14.9 million is included
  within the business restructuring exceptional item, (2004  £11.2
  million; 2003  £8.2 million). A prepayment of £401.2 million
  is included in the balance sheet at 31 March 2005 (2004  £97.0 million;
  2003  £58.5 million). Information about the pension arrangements
  for executive directors is contained in the report on remuneration.

FRS 17 Transitional disclosures
  GroupThe pension cost
  figures used in these accounts comply with the current pension cost accounting
  standard SSAP 24. Under transitional arrangements of FRS 17 Retirement
  Benefits, the group is required to disclose the following information
  about its pension arrangements and the figures that would have been shown under
  adoption of FRS 17 in the financial statements.

The latest formal valuations
  of the Schemes were carried out as at 31 March 2004. The valuation of liabilities
  detailed below has been derived by projecting forward the position at 31 March
  2004 and has been performed by an independent actuary, Mercer Human Resource
  Consulting. FRS 17 gives the present value of pension liabilities by discounting
  pension commitments (including an allowance for salary growth), at an AA corporate
  bond yield. The major difference arising between these two methodologies is
  in the valuation of the Schemes liabilities, which under FRS 17 are higher.
  Deferred pensions are revalued to retirement age in line with the Schemes
  rules and statutory requirements. The major financial assumptions used by the
  actuary were as follows:



|78 | United Utilities Annual
      Report & Accounts 2005
|-- | ----------------------------------------------------

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|                                 | At 31 March |      | At 31 March |  | At 31 March | 
|-------------------------------- | ----------- | ---- | ----------- |  | ----------- | 
|2005                             | 2004        | 2003
|                                 |             |      |             |  |             | 
|Discount rate                    | 5.40%       |      | 5.50%       |  | 5.50%       | 
|                                 |             |      |             |  |             | 
|Pensionable salary growth  UUPS | 4.10%       |      | 4.30%       |  | 4.00%       | 
|                                 |             |      |             |  |             | 
|Pensionable salary growth  ESPS | 4.30%       |      | 4.30%       |  | 4.00%       | 
|                                 |             |      |             |  |             | 
|Pension increases                | 2.80%       |      | 2.80%       |  | 2.50%       | 
|                                 |             |      |             |  |             | 
|Price inflation                  | 2.80%       |      | 2.80%       |  | 2.50%       | 
|                                 |             |      |             |  |             | 

The assets and liabilities of the Schemes, along with the expected rates of return on the Schemes assets as at 31 March 2005, 31 March 2004 and 31 March 2003 were as follows:

|                                      |                          |  |                          |   |                          | 
|------------------------------------- | ------------------------ |  | ------------------------ | - | ------------------------ | 
|                                      | At
        31 March 2005 |  | At
        31 March 2004 |   | At
        31 March 2003 | 
|                                      |                          |  |                          |   |                          | 
|                                      | Expected                 |  |                          |   | Expected                 | 
|                                      | rate of                  |  | Total                    |   | rate of                  | 
|                                      | return                   |  | £m                       |   | return                   | 
|                                      |                          |  |                          |   |                          | 
|Equities                              | 7.60%                    |  | 1,468.0                  |   | 7.60%                    | 
|                                      |                          |  |                          |   |                          | 
|Property                              | 7.60%                    |  | 1.3                      |   | 7.60%                    | 
|                                      |                          |  |                          |   |                          | 
|Bonds                                 | 5.40%                    |  | 343.8                    |   | 5.50%                    | 
|                                      |                          |  |                          |   |                          | 
|Gilts                                 | 4.60%                    |  | 428.2                    |   | 4.60%                    | 
|                                      |                          |  |                          |   |                          | 
|Other                                 | 4.60%                    |  | 61.4                     |   | 4.60%                    | 
|                                      |                          |  |                          |   |                          | 
|Market value of assets                |                          |  | 2,302.7                  |   |                          | 
|                                      |                          |  |                          |   |                          | 
|Present value of Schemes liabilities |                          |  | (2,382.3                 | ) |                          | 
|                                      |                          |  |                          |   |                          | 
|Implied deficit in the Schemes        |                          |  | (79.6                    | ) |                          | 
|                                      |                          |  |                          |   |                          | 
|Related deferred tax asset            |                          |  | 23.9                     |   |                          | 
|                                      |                          |  |                          |   |                          | 
|Net pension liability under FRS 17    |                          |  | (55.7                    | ) |                          | 
|                                      |                          |  |                          |   |                          | 
|                                      |                          |  |                          |   |                          | 

If the above amounts had been recognised in the financial statements, the groups net assets and profit and loss reserve as at 31 March 2005, 31 March 2004 and 31 March 2003 would be as
follows:

|                                                    | 2005£m  |   | 2004£m  |   | 2003£m  |  
|--------------------------------------------------- | ------- | - | ------- | - | ------- | -
|                                                    |         |   |         |   |         |  
|Net assets excluding pension liability              | 3,118.7 |   | 3,102.9 |   | 2,551.3 |  
|                                                    |         |   |         |   |         |  
|SSAP 24 prepayment, net of deferred tax             | (280.8  | ) | (67.9   | ) | (41.0   | )
|                                                    |         |   |         |   |         |  
|Accruals for unfunded scheme                        | 8.5     |   | 7.2     |   | 6.2     |  
|                                                    |         |   |         |   |         |  
|Pension liability                                   | (55.7   | ) | (264.4  | ) | (298.1  | )
|                                                    |         |   |         |   |         |  
|Net assets including pension liability              | 2,790.7 |   | 2,777.8 |   | 2,218.4 |  
|                                                    |         |   |         |   |         |  
|Profit and loss reserve excluding pension liability | 1,362.5 |   | 1,348.4 |   | 1,302.8 |  
|                                                    |         |   |         |   |         |  
|SSAP 24 prepayment, net of deferred tax             | (280.8  | ) | (67.9   | ) | (41.0   | )
|                                                    |         |   |         |   |         |  
|Accruals for unfunded scheme                        | 8.5     |   | 7.2     |   | 6.2     |  
|                                                    |         |   |         |   |         |  
|Pension liability                                   | (55.7   | ) | (264.4  | ) | (298.1  | )
|                                                    |         |   |         |   |         |  
|Profit and loss reserve including pension liability | 1,034.5 |   | 1,023.3 |   | 969.9   |  
|                                                    |         |   |         |   |         |  

The amounts which, on full
      implementation of FRS 17, will be required in the financial statements
are as follows:

|Analysis of the amount
         charged
to operating profit | 2005£m |   | 2004£m |  
|----------------------------------------------------------- | ------ | - | ------ | -
|                                                            |        |   |        |  
|Current service cost                                        | 55.5   |   | 45.1   |  
|                                                            |        |   |        |  
|Past service cost                                           | 0.6    |   | 1.8    |  
|                                                            |        |   |        |  
|Settlement gain                                             | (7.8   | ) |       |  
|                                                            |        |   |        |  
|Total operating charge                                      | 48.3   |   | 46.9   |  
|                                                            |        |   |        |  
|                                                            |        |   |        |  
|Analysis of other finance costs                             | 2005   |   | 2004   |  
|                                                            | £m     |   | £m     |  
|                                                            |        |   |        |  
|Expected return on pension scheme assets                    | 124.3  |   | 108.4  |  
|                                                            |        |   |        |  
|Interest on pension scheme liabilities                      | (122.8 | ) | (115.0 | )
|                                                            |        |   |        |  
|Net return/(cost)                                           | 1.5    |   | (6.6   | )
|                                                            |        |   |        |  

|                                               |   
|---------------------------------------------- | --
|United Utilities Annual Report & Accounts 2005 | 79

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Financial statementsNotes to the accounts continued

|Analysis of amount recognised in statement of total recognised gains and losses | 2005   |   | 2004   |  
|------------------------------------------------------------------------------- | ------ | - | ------ | -
|                                                                                | £m     |   | £m     |  
|                                                                                |        |   |        |  
|Actual return less expected return on pension scheme assets                     | 63.2   |   | 176.4  |  
|                                                                                |        |   |        |  
|Experience gains and losses arising on the scheme liabilities                   | (31.0  | ) |       |  
|                                                                                |        |   |        |  
|Changes in assumptions underlying the present value of the scheme liabilities   | (41.1  | ) | (122.9 | )
|                                                                                |        |   |        |  
|Actuarial (loss)/gain                                                           | (8.9   | ) | 53.5   |  
|                                                                                |        |   |        |  
|                                                                                |        |   |        |  
|Movement on pension scheme deficit during the year                              | 2005   |   | 2004   |  
|                                                                                | £m     |   | £m     |  
|                                                                                |        |   |        |  
|Deficit at 1 April                                                              | (264.4 | ) | (298.1 | )
|                                                                                |        |   |        |  
|Movement in year:                                                               |        |   |        |  
|                                                                                |        |   |        |  
|Current service cost                                                            | (55.5  | ) | (45.1  | )
|                                                                                |        |   |        |  
|Contributions                                                                   | 368.7  |   | 48.1   |  
|                                                                                |        |   |        |  
|Past service cost                                                               | (15.5  | ) | (1.8   | )
|                                                                                |        |   |        |  
|Settlement gain                                                                 | 7.8    |   |       |  
|                                                                                |        |   |        |  
|Net interest return/(cost) on assets                                            | 1.5    |   | (6.6   | )
|                                                                                |        |   |        |  
|Actuarial (loss)/gain                                                           | (8.9   | ) | 53.5   |  
|                                                                                |        |   |        |  
|Movement in deferred tax asset                                                  | (89.4  | ) | (14.4  | )
|                                                                                |        |   |        |  
|Deficit in scheme at 31 March                                                   | (55.7  | ) | (264.4 | )
|                                                                                |        |   |        |  
|                                                                                |        |   |        |  
|History of experience of gains and losses                                       |        |   |        |  
|                                                                                | 2005   |   | 2004   |  
|                                                                                |        |   |        |  
|Difference between the expected and actual return on scheme assets:             |        |   |        |  
|                                                                                |        |   |        |  
|Amount
    (£m)                                                                 | 63.2   |   | 176.4  |  
|                                                                                |        |   |        |  
|Percentage of scheme assets                                                     | 2.7%   |   | 9.5%   |  
|                                                                                |        |   |        |  
|Experience gains and losses on scheme liabilities:                              |        |   |        |  
|                                                                                |        |   |        |  
|Amount
    (£m)                                                                 | (31.0  | ) |       |  
|                                                                                |        |   |        |  
|Percentage of the present value of the scheme liabilities                       | (1.3%  | ) |       |  
|                                                                                |        |   |        |  
|Total amount recognised in statement of total recognised gains and losses:      |        |   |        |  
|                                                                                |        |   |        |  
|Amount
    (£m)                                                                 | (8.9   | ) | 53.5   |  
|                                                                                |        |   |        |  
|Percentage of the present value of the scheme liabilities                       | (0.4%  | ) | 2.4%   |  
|                                                                                |        |   |        |  

In addition, £14.9 million (2004  £nil; 2003  £1.5
million) of the past service cost is included for pension severance benefits,
within the business restructuring
exceptional item.

During the year, the group made £3.3 million (2004  £0.3 million; 2003  £0.1
million) of contributions to defined contribution schemes.

CompanyThe companys
assets and liabilities are included in the Schemes but its share of underlying
assets and liabilities
has not been separately identified.

27 LEASE COMMITMENTSSubsidiary undertakings are committed to making the following payments under operating leases during the next 12 months:

|                           |           |  | 31 March 2005 |  |           |  | 31 March 2004 | 
|-------------------------- | --------- |  | ------------- |  | --------- |  | ------------- | 
|                           |           |  |               |  |           |  |               | 
|                           | Land and  |  | Plant and     |  | Land and  |  | Plant and     | 
|                           | buildings |  | machinery     |  | buildings |  | machinery     | 
|                           | £m        |  | £m            |  | £m        |  | £m            | 
|                           |           |  |               |  |           |  |               | 
|Leases which expire:       |           |  |               |  |           |  |               | 
|                           |           |  |               |  |           |  |               | 
|Within one year            | 0.5       |  | 0.9           |  | 1.2       |  | 1.4           | 
|                           |           |  |               |  |           |  |               | 
|Between two and five years | 3.3       |  | 2.2           |  | 1.5       |  | 2.1           | 
|                           |           |  |               |  |           |  |               | 
|After five years           | 6.8       |  | 0.1           |  | 4.6       |  |              | 
|                           |           |  |               |  |           |  |               | 
|                           | 10.6      |  | 3.2           |  | 7.3       |  | 3.5           | 
|                           |           |  |               |  |           |  |               | 

|   |                                                   
|-- | --------------------------------------------------
|80 | United Utilities Annual
    Report & Accounts 2005

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Minimum future lease payments under finance leases and minimum rental commitments under non-cancellable operating leases of property, plant and equipment at 31 March 2005 were as follows:

|           | Finance |  | Operating | 
|---------- | ------- |  | --------- | 
|           | leases  |  | leases    | 
|           | £m      |  | £m        | 
|           |         |  |           | 
|2006       | 0.8     |  | 13.8      | 
|           |         |  |           | 
|2007       | 5.1     |  | 11.8      | 
|           |         |  |           | 
|2008       | 6.2     |  | 9.5       | 
|           |         |  |           | 
|2009       | 7.4     |  | 8.2       | 
|           |         |  |           | 
|2010       | 8.8     |  | 7.6       | 
|           |         |  |           | 
|Thereafter | 52.7    |  | 203.4     | 
|           |         |  |           | 
|Total      | 81.0    |  | 254.3     | 
|           |         |  |           | 
|           |         |  |           | 

28 CONTINGENT LIABILITIES

The company guaranteed loans
      of group undertakings up to a maximum amount of £654.4 million (2004  £695.3 million ), including £564.4 million (2004 £595.3 million)
  relating to United Utilities Water PLCs loans from European Investment Bank, £90.0 million (2004  £90.0 million) relating to United Utilities Electricity PLCs loans from European Investment Bank and £nil (2004
 £10.0 million) relating to United Utilities Green Energy Limiteds
loan from European Investment Bank.

The company has entered
into performance bonds in the ordinary course of business.

29 RECONCILIATION OF OPERATING
PROFIT TO OPERATING CASHFLLOWS

|                                                                             |      | 2005   |   | 2004     |   | 2003   |  
|---------------------------------------------------------------------------- | ---- | ------ | - | -------- | - | ------ | -
|                                                                             | Note | £m     |   | £m       |   | £m     |  
|                                                                             |      |        |   |          |   |        |  
|Group
          operating profit                                             |      | 623.2  |   | 570.1    |   | 510.0  |  
|                                                                             |      |        |   |          |   |        |  
|Exceptional
          charges within group operating profit                  |      | 29.7   |   | 4.6      |   | 29.3   |  
|                                                                             |      |        |   |          |   |        |  
|Group
          operating profit before exceptional charges                  |      | 652.9  |   | 574.7    |   | 539.3  |  
|                                                                             |      |        |   |          |   |        |  
|Depreciation                                                                 | 3    | 365.9  |   | 368.0    |   | 349.8  |  
|                                                                             |      |        |   |          |   |        |  
|Amortisation
          of goodwill and intangible assets                     | 3    | 15.5   |   | 8.1      |   | 7.1    |  
|                                                                             |      |        |   |          |   |        |  
|Profit
          on disposal of tangible fixed assets                        | 5    | (4.4   | ) | (7.1     | ) | (4.5   | )
|                                                                             |      |        |   |          |   |        |  
|Stocks
          (increase)/decrease                                         |      | (2.0   | ) | 3.5      |   | (11.8  | )
|                                                                             |      |        |   |          |   |        |  
|Debtors
          increase                                                   |      | (281.3 | ) | (53.9    | ) | (21.9  | )
|                                                                             |      |        |   |          |   |        |  
|Creditors
          (decrease)/increase                                      |      | (1.4   | ) | 34.6     |   | 0.6    |  
|                                                                             |      |        |   |          |   |        |  
|Outflow
          related to exceptional items                               |      | (20.3  | ) | (4.4     | ) | (7.1   | )
|                                                                             |      |        |   |          |   |        |  
|                                                                             |      | 724.9  |   | 923.5    |   | 851.5  |  
|                                                                             |      |        |   |          |   |        |  
|                                                                             |      |        |   |          |   |        |  
|                                                                             |      |        |   |          |   |        |  
|30
          RETURNS ON INVESTMENTS AND SERVICING OF FINANCE                 |      |        |   |          |   |        |  
|                                                                             |      | 2005   |   | 2004     |   | 2003   |  
|                                                                             |      | £m     |   | £m       |   | £m     |  
|                                                                             |      |        |   |          |   |        |  
|Interest
          received                                                  |      | 47.3   |   | 36.0     |   | 26.8   |  
|                                                                             |      |        |   |          |   |        |  
|Interest
          paid on bank loans, overdrafts and other loans            |      | (324.5 | ) | (264.3   | ) | (233.2 | )
|                                                                             |      |        |   |          |   |        |  
|Interest
          paid on finance leases                                    |      | (5.6   | ) | (6.1     | ) | (12.1  | )
|                                                                             |      |        |   |          |   |        |  
|Termination
          of interest rate swap contracts                        |      | 19.7   |   | 83.0     |   |       |  
|                                                                             |      |        |   |          |   |        |  
|Dividends
          paid to minority equity interest                         |      |       |   | (0.4     | ) | (0.4   | )
|                                                                             |      |        |   |          |   |        |  
|                                                                             |      | (263.1 | ) | (151.8   | ) | (218.9 | )
|                                                                             |      |        |   |          |   |        |  
|                                                                             |      |        |   |          |   |        |  
|                                                                             |      |        |   |          |   |        |  
|31
          CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT                    |      |        |   |          |   |        |  
|                                                                             |      | 2005   |   | 2004     |   | 2003   |  
|                                                                             |      | £m     |   | £m       |   | £m     |  
|                                                                             |      |        |   |          |   |        |  
|Purchase
          of tangible fixed assets, net of grants and contributions |      | (901.2 | ) | (1,010.5 | ) | (718.2 | )
|                                                                             |      |        |   |          |   |        |  
|Sale
          of tangible fixed assets                                      |      | 7.9    |   | 13.0     |   | 7.2    |  
|                                                                             |      |        |   |          |   |        |  
|Purchase
          of fixed asset investments                                |      |       |   |         |   | (0.4   | )
|                                                                             |      |        |   |          |   |        |  
|Financial
          restructuring of joint ventures                          |      | 3.2    |   | (20.5    | ) | 5.7    |  
|                                                                             |      |        |   |          |   |        |  
|Sale
          of fixed asset investments other than joint ventures          |      | 6.3    |   |         |   | 7.8    |  
|                                                                             |      |        |   |          |   |        |  
|                                                                             |      | (883.8 | ) | (1,018.0 | ) | (697.9 | )
|                                                                             |      |        |   |          |   |        |  

|                                                   |   
|-------------------------------------------------- | --
|United Utilities Annual
    Report & Accounts 2005 | 81

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Financial statementsNotes to the accounts
  continued

|32   ACQUISITIONS
      AND DISPOSALS                   |              |   |           |   |      |   |      |   |      |  |      |  
|------------------------------------------------------- | ------------ | - | --------- | - | ---- | - | ---- | - | ---- |  | ---- | -
|                                                        | Acquisitions |   | Disposals |  
|                                                        |              |   |           |  
|                                                        | 2005         |   | 2004      |   | 2003 |   | 2005 |   | 2004 |  | 2003 |  
|                                                        | £m           |   | £m        |   | £m   |   | £m   |   | £m   |  | £m   |  
|                                                        |              |   |           |   |      |   |      |   |      |  |      |  
|Fixed assets                                            |             |   | (8.8      | ) | (3.1 | ) | 49.0 |   |     |  |     |  
|                                                        |              |   |           |   |      |   |      |   |      |  |      |  
|Net current liabilities                                 |             |   | 1.5       |   | 2.1  |   | 3.4  |   |     |  | 10.0 |  
|                                                        |              |   |           |   |      |   |      |   |      |  |      |  
|Provisions for
      liabilities and charges            |             |   | 0.4       |   | 3.0  |   | (3.4 | ) |     |  |     |  
|                                                        |              |   |           |   |      |   |      |   |      |  |      |  
|Minority interest                                       | (20.3        | ) |          |   |     |   |     |   |     |  |     |  
|                                                        |              |   |           |   |      |   |      |   |      |  |      |  
|Fair value of
      net assets acquired/book value of   |              |   |           |   |      |   |      |   |      |  |      |  
|net assets disposed                                     | (20.3        | ) | (6.9      | ) | 2.0  |   | 49.0 |   |     |  | 10.0 |  
|                                                        |              |   |           |   |      |   |      |   |      |  |      |  
|Cost of disposal                                        |              |   |           |   |      |   | 5.4  |   |     |  | (3.4 | )
|                                                        |              |   |           |   |      |   |      |   |      |  |      |  
|Goodwill acquired/written
      back on disposal        | (27.4        | ) | (55.0     | ) | (7.2 | ) | 9.1  |   |     |  | 0.9  |  
|                                                        |              |   |           |   |      |   |      |   |      |  |      |  
|Consideration
      for undertakings acquired           | (47.7        | ) | (61.9     | ) | (5.2 | ) |      |   |      |  |      |  
|                                                        |              |   |           |   |      |   |      |   |      |  |      |  
|Profit on disposals                                     |              |   |           |   |      |   | 1.7  |   |     |  | 0.4  |  
|                                                        |              |   |           |   |      |   |      |   |      |  |      |  
|                                                        | (47.7        | ) | (61.9     | ) | (5.2 | ) | 65.2 |   |     |  | 7.9  |  
|                                                        |              |   |           |   |      |   |      |   |      |  |      |  
|Less:                                                   |              |   |           |   |      |   |      |   |      |  |      |  
|                                                        |              |   |           |   |      |   |      |   |      |  |      |  
| Cash included
      in undertakings acquired/disposed |             |   | 0.3       |   | 0.3  |   |     |   |     |  |     |  
|                                                        |              |   |           |   |      |   |      |   |      |  |      |  
| Deferred
      consideration                          | (0.5         | ) | 15.6      |   |     |   |     |   |     |  |     |  
|                                                        |              |   |           |   |      |   |      |   |      |  |      |  
|Cash consideration                                      | (48.2        | ) | (46.0     | ) | (4.9 | ) | 65.2 |   |     |  | 7.9  |  
|                                                        |              |   |           |   |      |   |      |   |      |  |      |  
|                                                        |              |   |           |   |      |   |      |   |      |  |      |  
|Comprising:                                             |              |   |           |   |      |   |      |   |      |  |      |  
|                                                        |              |   |           |   |      |   |      |   |      |  |      |  
| (Outflow)/inflow
      arising on:                    |              |   |           |   |      |   |      |   |      |  |      |  
|                                                        |              |   |           |   |      |   |      |   |      |  |      |  
|
      current year acquisitions/disposals             | (47.7        | ) | (46.0     | ) | (4.7 | ) | 65.2 |   |     |  | 7.9  |  
|                                                        |              |   |           |   |      |   |      |   |      |  |      |  
|
      previous year acquisitions/disposals            | (0.5         | ) |          |   | (0.2 | ) |     |   |     |  |     |  
|                                                        |              |   |           |   |      |   |      |   |      |  |      |  
|                                                        | (48.2        | ) | (46.0     | ) | (4.9 | ) | 65.2 |   |     |  | 7.9  |  
|                                                        |              |   |           |   |      |   |      |   |      |  |      |  

The group purchased
  the 14.6 per cent equity stake held by Capgemini UK PLC in its subsidiary, Vertex
  Data Science Limited on 5 November 2004, taking the groups shareholding
  to 100 per cent. The group also sold United Utilities Green Energy Limited on
  17 December 2004 and reduced its shareholding in Manila Water Company Inc, from
  17.96 per cent to 11.68 per cent by placing shares during its successful listing
  on the Philippine Stock Exchange. The cashflows in respect of these acquisitions
  and disposals are included above.

The group acquired
  First Revenue Assurance LLC on 31 March 2004, Eurocall Limited on 29 February
  2004, Park Environmental Limited on 22 December 2003, Octel Waste Management
  Limited on 26 June 2003 and Connections Plus on 15 April 2003. The cashflows
  in respect of those acquisitions are shown above.

On 2 December 2002,
  Vertex Data Science Limited acquired the business and assets of the UK contact
  centre operator, 7C, and its 75 per cent shareholding in 7C India Limited. The
  cashflows in respect of that acquisition are shown above. On 31 July 2002, the
  group sold its joint venture shareholding in US Water, effectively completing
  the groups withdrawal from infrastructure management in the Americas.
  The cashflows in respect of that sale are included above.

|33                                                                    | MANAGEMENT
      OF LIQUID RESOURCES |      |        |      |        |      | 
|--------------------------------------------------------------------- | ------------------------------------ | ---- | ------ | ---- | ------ | ---- | 
|                                                                      |                                      | 2005 |        | 2004 |        | 2003 | 
|                                                                      |                                      | £m   |        | £m   |        | £m   | 
|                                                                      |                                      |      |        |      |        |     
|Decrease/(increase)
      in managed funds and short-term investments | 176.9                                |      | (338.4 | )    | (282.0 | )   
|                                                                      |                                      |      |        |      |        |     



|82 | United Utilities
      Annual Report & Accounts 2005
|-- | ----------------------------------------------------

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34   FINANCING

|                     | Financing
       shares |   | Financing
       debt |   | Total    |  
|-------------------- | ------------------------ | - | ---------------------- | - | -------- | -
|                     |                          |   |                        |   |          |  
|                     | Shares
      issued      |   |                        |   |          |  
|                     | by company               |   |                        |   |          |  
|                     |                          |   |                        |   |          |  
|                     | Share                    |   | Share                  |   |          |  
|                     | capital                  |   | premium                |   | Total    |  
|                     | £m                       |   | £m                     |   | £m       |  
|                     |                          |   |                        |   |          |  
|At 31 March 2002     | (555.9                   | ) | (671.6                 | ) | (1,227.5 | )
|                     |                          |   |                        |   |          |  
|Exchange and other   |                          |   |                        |   |          |  
|non-cash adjustments |                         |   |                       |   |         |  
|                     |                          |   |                        |   |          |  
|Financing:           |                          |   |                        |   |          |  
|                     |                          |   |                        |   |          |  
| New finance        | (0.6                     | ) | (2.7                   | ) | (3.3     | )
|                     |                          |   |                        |   |          |  
| Finance repaid     |                         |   |                       |   |         |  
|                     |                          |   |                        |   |          |  
|Cash flow            | (0.6                     | ) | (2.7                   | ) | (3.3     | )
|                     |                          |   |                        |   |          |  
|At 31 March 2003     | (556.5                   | ) | (674.3                 | ) | (1,230.8 | )
|                     |                          |   |                        |   |          |  
|Exchange and other   |                          |   |                        |   |          |  
|non-cash adjustments |                         |   |                       |   |         |  
|                     |                          |   |                        |   |          |  
|Financing:           |                          |   |                        |   |          |  
|                     |                          |   |                        |   |          |  
| New finance        | (155.3                   | ) | (348.8                 | ) | (504.1   | )
|                     |                          |   |                        |   |          |  
| Finance repaid     |                         |   |                       |   |         |  
|                     |                          |   |                        |   |          |  
|Cash flow            | (155.3                   | ) | (348.8                 | ) | (504.1   | )
|                     |                          |   |                        |   |          |  
|At 31 March 2004     | (711.8                   | ) | (1,023.1               | ) | (1,734.9 | )
|                     |                          |   |                        |   |          |  
|Exchange and other   |                          |   |                        |   |          |  
|non-cash adjustments |                         |   |                       |   |         |  
|                     |                          |   |                        |   |          |  
|Financing:           |                          |   |                        |   |          |  
|                     |                          |   |                        |   |          |  
| New finance        | (4.4                     | ) | (15.6                  | ) | (20.0    | )
|                     |                          |   |                        |   |          |  
| Finance repaid     |                         |   |                       |   |         |  
|                     |                          |   |                        |   |          |  
|Cash flow            | (4.4                     | ) | (15.6                  | ) | (20.0    | )
|                     |                          |   |                        |   |          |  
|At 31 March 2005     | (716.2                   | ) | (1038.7                | ) | (1,754.9 | )
|                     |                          |   |                        |   |          |  

|             |                          | Repayment              |  |          |  | Rate     |  | Amount | 
|------------ | ------------------------ | ---------------------- |  | -------- |  | -------- |  | ------ | 
|             |                          | dates                  |  | Currency |  | %        |  | £m     | 
|             |                          |                        |  |          |  |          |  |        | 
|Loans repaid | European Investment Bank | various                |  | sterling |  | various  |  | 40.9   | 
|             |                          |                        |  |          |  |          |  |        | 
|             | Debt securities          | 25 March, 25 September |  | sterling |  | 8.875    |  | 4.4    | 
|             |                          |                        |  |          |  |          |  |        | 
|             | US$20 million due 2005   | 14 March 2005          |  | US$      |  | floating |  | 13.8   | 
|             |                          |                        |  |          |  |          |  |        | 
|             | Loan notes               | 15 September 2004      |  | sterling |  | floating |  | 0.5    | 
|             |                          |                        |  |          |  |          |  |        | 
|             | Local authority          | various                |  | sterling |  | various  |  | 0.6    | 
|             |                          |                        |  |          |  |          |  |        | 
|             |                          |                        |  |          |  |          |  | 60.2   | 
|             |                          |                        |  |          |  |          |  |        | 



|United Utilities
      Annual Report & Accounts 2005 | 83
|---------------------------------------------------- | --

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Financial statementsNotes to the accounts
  continued

35   ANALYSIS
  OF NET DEBT

|                     |       |   |                        |   |             |   |            |   |         |   |          |   | Current asset |   |          |  
|-------------------- | ----- | - | ---------------------- | - | ----------- | - | ---------- | - | ------- | - | -------- | - | ------------- | - | -------- | -
|                     | Cash  |   | Financing
       debt |   | investments |   | Net debt   |  
|                     |       |   |                        |   |             |   |            |  
|                     |       |   | Loans                  |   | Short-term  |   |            |   |         |   |          |   |               |  
|                     |       |   |                        |   |             |   |            |   |         |   |          |   |               |  
|                     |       |   |                        |   |             |   | borrowings |   |         |   |          |   |               |   |          |  
|                     |       |   | Due after              |   | Due within  |   | other than |   | Finance |   |          |   |               |   |          |  
|                     |       |   | one year               |   | one year    |   | overdrafts |   | leases  |   | Total    |   |               |   |          |  
|                     | £m    |   | £m                     |   | £m          |   | £m         |   | £m      |   | £m       |   | £m            |   | £m       |  
|                     |       |   |                        |   |             |   |            |   |         |   |          |   |               |   |          |  
|At 31 March 2002     | (10.6 | ) | (3,012.0               | ) | (71.0       | ) | (135.4     | ) | (200.6  | ) | (3,419.0 | ) | 368.8         |   | (3,060.8 | )
|                     |       |   |                        |   |             |   |            |   |         |   |          |   |               |   |          |  
|Exchange and other   |       |   |                        |   |             |   |            |   |         |   |          |   |               |   |          |  
|non-cash adjustments | 0.2   |   |                       |   |            |   |           |   | 4.9     |   | 4.9      |   |              |   | 5.1      |  
|                     |       |   |                        |   |             |   |            |   |         |   |          |   |               |   |          |  
|Cash flow            | 10.3  |   | (668.0                 | ) | 35.1        |   | 16.5       |   | 5.9     |   | (610.5   | ) | 282.0         |   | (318.2   | )
|                     |       |   |                        |   |             |   |            |   |         |   |          |   |               |   |          |  
|At 31 March 2003     | (0.1  | ) | (3,680.0               | ) | (35.9       | ) | (118.9     | ) | (189.8  | ) | (4,024.6 | ) | 650.8         |   | (3,373.9 | )
|                     |       |   |                        |   |             |   |            |   |         |   |          |   |               |   |          |  
|Exchange and other   |       |   |                        |   |             |   |            |   |         |   |          |   |               |   |          |  
|non-cash adjustments |      |   |                       |   |            |   |           |   | 6.3     |   | 6.3      |   |              |   | 6.3      |  
|                     |       |   |                        |   |             |   |            |   |         |   |          |   |               |   |          |  
|Cash flow            | 9.6   |   | (626.3                 | ) | (13.8       | ) | 118.9      |   | 102.4   |   | (418.8   | ) | 338.4         |   | (70.8    | )
|                     |       |   |                        |   |             |   |            |   |         |   |          |   |               |   |          |  
|At 31 March 2004     | 9.5   |   | (4,306.3               | ) | (49.7       | ) |           |   | (81.1   | ) | (4,437.1 | ) | 989.2         |   | (3,438.4 | )
|                     |       |   |                        |   |             |   |            |   |         |   |          |   |               |   |          |  
|Exchange and other   |       |   |                        |   |             |   |            |   |         |   |          |   |               |   |          |  
|non-cash adjustments | 0.7   |   | (4.9                   | ) |            |   |           |   |        |   | (4.9     | ) |              |   | (4.2     | )
|                     |       |   |                        |   |             |   |            |   |         |   |          |   |               |   |          |  
|Cash flow            | 1.7   |   | (105.8                 | ) | (417.6      | ) |           |   | 0.1     |   | (523.3   | ) | (176.9        | ) | (698.5   | )
|                     |       |   |                        |   |             |   |            |   |         |   |          |   |               |   |          |  
|At 31 March 2005     | 11.9  |   | (4,417.0               | ) | (467.3      | ) |           |   | (81.0   | ) | (4,965.3 | ) | 812.3         |   | (4,141.1 | )
|                     |       |   |                        |   |             |   |            |   |         |   |          |   |               |   |          |  

|                               |              |  |                                 |   |           |   |            |   |        |   | Cash         |  
|------------------------------ | ------------ |  | ------------------------------- | - | --------- | - | ---------- | - | ------ | - | ------------ | -
|                               |              |  |                                 |   |           |   |            |   |        |   | (at bank and |  
|Cash and short-term borrowings | Cash at bank |  | Short-term
          borrowings |   | Net total |   | overdrafts | )
|                               |              |  |                                 |   |           |   |            |  
|                               |              |  | Overdrafts                      |   | Other     |   | Total      |   |        |   |              |  
|                               | £m           |  | £m                              |   | £m        |   | £m         |   | £m     |   | £m           |  
|                               |              |  |                                 |   |           |   |            |   |        |   |              |  
|At 31 March 2002               | 18.9         |  | (29.5                           | ) | (135.4    | ) | (164.9     | ) | (146.0 | ) | (10.6        | )
|                               |              |  |                                 |   |           |   |            |   |        |   |              |  
|Exchange adjustments           | 0.2          |  |                                |   |          |   |           |   | 0.2    |   | 0.2          |  
|                               |              |  |                                 |   |           |   |            |   |        |   |              |  
|Cash flow                      | 19.4         |  | (9.1                            | ) | 16.5      |   | 7.4        |   | 26.8   |   | 10.3         |  
|                               |              |  |                                 |   |           |   |            |   |        |   |              |  
|At 31 March 2003               | 38.5         |  | (38.6                           | ) | (118.9    | ) | (157.5     | ) | (119.0 | ) | (0.1         | )
|                               |              |  |                                 |   |           |   |            |   |        |   |              |  
|Cash flow                      | 3.6          |  | 6.0                             |   | 118.9     |   | 124.9      |   | 128.5  |   | 9.6          |  
|                               |              |  |                                 |   |           |   |            |   |        |   |              |  
|At 31 March 2004               | 42.1         |  | (32.6                           | ) |          |   | (32.6      | ) | 9.5    |   | 9.5          |  
|                               |              |  |                                 |   |           |   |            |   |        |   |              |  
|Exchange adjustments           | 0.7          |  |                                |   |          |   |           |   | 0.7    |   | 0.7          |  
|                               |              |  |                                 |   |           |   |            |   |        |   |              |  
|Cash flow                      | 6.2          |  | (4.5                            | ) |          |   | (4.5       | ) | 1.7    |   | 1.7          |  
|                               |              |  |                                 |   |           |   |            |   |        |   |              |  
|At 31 March 2005               | 49.0         |  | (37.1                           | ) |          |   | (37.1      | ) | 11.9   |   | 11.9         |  
|                               |              |  |                                 |   |           |   |            |   |        |   |              |  

36RELATED
  PARTY TRANSACTIONS

Sales and recharges
  to joint ventures on normal trading terms during the year ended 31 March 2005
  were £71.1 million (31 March 2004  £40.3 million) of these
  amounts £14.6 million was outstanding at the year end (2004  £11.1
  million).

Movements on loans
  and investments with joint ventures are included in note 14 of the accounts.

There were no other
  material related party transactions during the year.

|84 | United Utilities
      Annual Report & Accounts 2005
|-- | ----------------------------------------------------

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|37                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | SUMMARY
      OF DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
      KINGDOM AND THE UNITED STATES OF AMERICA
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------
|The groups consolidated financial statements are prepared
      in accordance with accounting principles generally accepted in the United
      Kingdom (UK GAAP), 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
      equity shareholders funds (or shareholders equity) and the companys
      financial position under UK GAAP and those under US GAAP are set out below.                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|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 was received during September 2003. 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 Financial Reporting
      Standard No. 14, Earnings per Share. Further details of the
      adjustment are given in note 10 to the consolidated financial statements.
      The same restatements are required under US GAAP.

|                                                                                              |      |                 |                 |                 |   |       |  
|--------------------------------------------------------------------------------------------- | ---- | --------------- | --------------- | --------------- | - | ----- | -
|Effect
            on net income of differences between UK and US GAAP                        |      |                 |                 |                
|                                                                                              |      | 2005            | 2004            | 2003           
|                                                                                              |      | As
    restated | As
    restated | As
    restated
|For
            the year ended 31 March                                                       | Note | £m              | £m              | £m             
|                                                                                              |      |                 |                 |                 |   |       |  
|Net income in
      accordance with UK GAAP                                                   |      | 333.1           |                 | 361.0           |   | 277.8 |  
|                                                                                              |      |                 |                 |                 |   |       |  
|US GAAP adjustments:                                                                          |      |                 |                 |                 |   |       |  
|                                                                                              |      |                 |                 |                 |   |       |  
| Pensions                                                                                    | (a)  | (2.7            | )               | (20.9           | ) | (7.5  | )
|                                                                                              |      |                 |                 |                 |   |       |  
| Infrastructure
      renewals                                                               | (b)  | 11.5            |                 | 25.6            |   | 49.4  |  
|                                                                                              |      |                 |                 |                 |   |       |  
| Depreciation
      of infrastructure assets                                                 | (c)  | (27.3           | )               | (25.5           | ) | (24.4 | )
|                                                                                              |      |                 |                 |                 |   |       |  
| Provisions                                                                                  | (d)  | (5.2            | )               | (0.8            | ) | (34.4 | )
|                                                                                              |      |                 |                 |                 |   |       |  
| Capitalisation
      of interest                                                            | (e)  | 85.4            |                 | 61.8            |   | 58.4  |  
|                                                                                              |      |                 |                 |                 |   |       |  
| Amortisation
      of capitalised interest                                                  | (e)  | (13.5           | )               | (11.4           | ) | (10.5 | )
|                                                                                              |      |                 |                 |                 |   |       |  
| Amortisation
      of goodwill                                                              | (f)  | 14.8            |                 | 8.8             |   | 7.5   |  
|                                                                                              |      |                 |                 |                 |   |       |  
| Impairment
      of long-lived assets                                                       | (g)  | (2.3            | )               | (3.3            | ) | 23.8  |  
|                                                                                              |      |                 |                 |                 |   |       |  
| Derivatives
      and hedging activities                                                    | (h)  | (69.1           | )               |                |   | 167.1 |  
|                                                                                              |      |                 |                 |                 |   |       |  
| Currency
      translation adjustments                                                      | (i)  |                |                 |                |   | (6.8  | )
|                                                                                              |      |                 |                 |                 |   |       |  
| Share
      compensation costs                                                              | (j)  | (6.6            | )               | (0.9            | ) | (2.0  | )
|                                                                                              |      |                 |                 |                 |   |       |  
| Revenue
      and related profit recognition                                                | (k)  | (6.9            | )               | (13.4           | ) | (31.4 | )
|                                                                                              |      |                 |                 |                 |   |       |  
| Business
      combinations                                                                 | (l)  | (9.0            | )               | (0.6            | ) |      |  
|                                                                                              |      |                 |                 |                 |   |       |  
| Deferred
      taxes                                                                        | (m)  | (65.3           | )               | (119.0          | ) | (0.8  | )
|                                                                                              |      |                 |                 |                 |   |       |  
| Tax effect
      of US GAAP adjustments                                                     | (m)  | 13.8            |                 | (3.2            | ) | (63.1 | )
|                                                                                              |      |                 |                 |                 |   |       |  
|Net income in
      accordance with US GAAP                                                   |      | 250.7           |                 | 258.2           |   | 403.1 |  
|                                                                                              |      |                 |                 |                 |   |       |  
|                                                                                              |      |                 |                 |                 |   |       |  
|Net
      income per £1 ordinary share in accordancewith US GAAP basic method (pence)         | (o)  | 35.2            |                 | 39.0            |   | 66.5  |  
|                                                                                              |      |                 |                 |                 |   |       |  
|Net
      income per £1 ordinary share in accordancewith
      US GAAP diluted method (pence) | (o)  | 31.8            |                 | 37.1            |   | 66.3  |  
|                                                                                              |      |                 |                 |                 |   |       |  

Net income for the fiscal
      years ended 31 March 2004 and 2003 and shareholders’ equity as at
      31 March 2004 under US GAAP were restated in the Company’s Form 20-F
      for the year ended 31 March 2005 filed on 3 June 2005 to reflect the translation
      of loans at spot rates instead of the contract rates in the hedging of
      derivatives. In addition, subsequent to the filing of the Company’s
      Form 20-F for the year ended 31 March 2005, a small number of differences
      have been identified in the US GAAP reconciliations of net income and shareholders’ equity,
      and these amounts have been restated accordingly. These differences were
      identified as part of the transition to International Financial Reporting
      Standards, with which the group has been required to comply from 1 April
      2005. The impact on net income and shareholders’ equity of these
differences is set out in the table below:

|                                                                    |  |  | 2005  |   |  | 2004  |   |  | 2003  |  
|------------------------------------------------------------------- |  |  | ----- | - |  | ----- | - |  | ----- | -
|                                                                    |  |  | £m    |   |  | £m    |   |  | £m    |  
|                                                                    |  |  |       |   |  |       |   |  |       |  
|Net income, as originally
          reported                        |  |  | 257.9 |   |  | 196.0 |   |  | 415.7 |  
|                                                                    |  |  |       |   |  |       |   |  |       |  
|Adjustments (net of
          taxation):                            |  |  |       |   |  |       |   |  |       |  
|                                                                    |  |  |       |   |  |       |   |  |       |  
|Retranslation of loans
          at spot rates                      |  |  |      |   |  | 97.8  |   |  | (21.8 | )
|                                                                    |  |  |       |   |  |       |   |  |       |  
|Net
          income, as reported in Form 20-F filed on 3 June 2005 |  |  | 257.9 |   |  | 293.8 |   |  | 393.9 |  
|                                                                    |  |  |       |   |  |       |   |  |       |  
|Reinstatement of liabilities
          (a)                          |  |  | (2.2  | ) |  | (2.1  | ) |  | 2.7   |  
|                                                                    |  |  |       |   |  |       |   |  |       |  
|Fair value of derivatives
          (b)                             |  |  | (4.6  | ) |  | (38.8 | ) |  |      |  
|                                                                    |  |  |       |   |  |       |   |  |       |  
|Enhancement expenditure
          (c)                               |  |  | (0.4  | ) |  | 5.3   |   |  | 6.5   |  
|                                                                    |  |  |       |   |  |       |   |  |       |  
|Net income,
          as reported herein                            |  |  | 250.7 |   |  | 258.2 |   |  | 403.1 |  
|                                                                    |  |  |       |   |  |       |   |  |       |  
|                                                                    |  |  |       |   |  |       |   |  |       |  

|                                                                        |  |  | 2005    |   |  | 2004    |  
|----------------------------------------------------------------------- |  |  | ------- | - |  | ------- | -
|                                                                        |  |  | £m      |   |  | £m      |  
|                                                                        |  |  |         |   |  |         |  
|Shareholders’ equity,
          as originally reported                  |  |  | 3,424.4 |   |  | 3,330.3 |  
|                                                                        |  |  |         |   |  |         |  
|Adjustments (net of
          taxation):                                |  |  |         |   |  |         |  
|                                                                        |  |  |         |   |  |         |  
|Retranslation of loans
          at spot rates                          |  |  |        |   |  | 17.8    |  
|                                                                        |  |  |         |   |  |         |  
|Shareholders'
    equity, as reported in Form 20-F filed on 3 June 2005 |  |  | 3,424.4 |   |  | 3,348.1 |  
|                                                                        |  |  |         |   |  |         |  
|Reinstatement of liabilities
          (a)                              |  |  | (18.3   | ) |  | (16.2   | )
|                                                                        |  |  |         |   |  |         |  
|Fair value of derivatives
          (b)                                 |  |  | (44.4   | ) |  | (39.8   | )
|                                                                        |  |  |         |   |  |         |  
|Enhancement expenditure
          (c)                                   |  |  | 42.8    |   |  | 43.3    |  
|                                                                        |  |  |         |   |  |         |  
|Shareholders’ equity,
          as reported herein                      |  |  | 3,404.5 |   |  | 3,335.4 |  
|                                                                        |  |  |         |   |  |         |  

The adjustments (each of
      which have a consequential tax impact) made since the filing of our Form
      20-F
      on 3 June 2005 are as follows:

| | a) | The reinstatement of liabilities
            in the US GAAP balance sheet that have yet to be legally extinguished.
            As permitted under UK GAAP, certain liabilities had been derecognised
            prior to being legally
            extinguished based on management’s judgement of the probability
            of the obligation arising, which is influenced by the passage of
            time. Under US GAAP, such liabilities should not be derecognised
            until legally extinguished, and those amounts have therefore been
            added back to the US GAAP reconciliation.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

| | b) | The adjustment to the fair
            value of certain highly complex derivative financial instruments.
            This difference principally arose due to a mechanical database valuation
            error that had mistakenly overridden yields for certain derivative
            instruments, that had been manually input into the system.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                    

| | c) | The amendment to enhancement
            expenditure classified as infrastructure renewals, which is capitalised
            under US GAAP. This adjustment had a consequential impact on the
            reported depreciation of infrastructure assets. This difference arose
            due to clerical error
            in extracting the values from the underlying data.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                     |   
|---------------------------------------------------- | --
|United
      Utilities Annual Report & Accounts 2005 | 85

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**Financial statements****Notes
  to the accounts continued**

|Cumulative effect
      on shareholders equity of differences between UK and US GAAP |      |                 |   |                 |  
|------------------------------------------------------------------------------------- | ---- | --------------- | - | --------------- | -
|                                                                                      |      |                 |   |                 |  
|                                                                                      |      | 2005            |   | 2004            |  
|                                                                                      |      | As
    restated |   | As
    restated |  
|At
      31 March                                                                     | Note | £m              |   | £m              |  
|                                                                                      |      |                 |   |                 |  
|Shareholders
      equity in accordance with UK GAAP                                 |      | 3,117.4         |   | 3,083.3         |  
|                                                                                      |      |                 |   |                 |  
|US GAAP adjustments:                                                                  |      |                 |   |                 |  
|                                                                                      |      |                 |   |                 |  
| Pensions                                                                            | (a)  | (222.5          | ) | (349.8          | )
|                                                                                      |      |                 |   |                 |  
| Infrastructure
      renewals                                                       | (b)  | 224.4           |   | 212.9           |  
|                                                                                      |      |                 |   |                 |  
| Depreciation
      of infrastructure assets                                         | (c)  | (275.7          | ) | (248.4          | )
|                                                                                      |      |                 |   |                 |  
| Provisions
            and liabilities                                              | (d)  | (26.1           | ) | (20.9           | )
|                                                                                      |      |                 |   |                 |  
| Capitalisation
      of interest                                                    | (e)  | 673.1           |   | 587.7           |  
|                                                                                      |      |                 |   |                 |  
| Amortisation
      of capitalised interest                                          | (e)  | (87.9           | ) | (74.4           | )
|                                                                                      |      |                 |   |                 |  
| Goodwill                                                                            | (f)  | 902.4           |   | 886.0           |  
|                                                                                      |      |                 |   |                 |  
| Impairment
      of long-lived assets                                               | (g)  | 18.2            |   | 20.5            |  
|                                                                                      |      |                 |   |                 |  
| Derivatives
      and hedging activities                                            | (h)  | (40.9           | ) | 10.9            |  
|                                                                                      |      |                 |   |                 |  
| Share
      compensation costs                                                      | (j)  | 11.2            |   | 7.0             |  
|                                                                                      |      |                 |   |                 |  
| Revenue
      and related profit recognition                                        | (k)  | (51.7           | ) | (44.8           | )
|                                                                                      |      |                 |   |                 |  
| Business
      combinations                                                         | (l)  | 25.9            |   | 36.5            |  
|                                                                                      |      |                 |   |                 |  
| Deferred
      taxes                                                                | (m)  | (1,014.1        | ) | (948.8          | )
|                                                                                      |      |                 |   |                 |  
| Dividends                                                                           | (n)  | 219.4           |   | 212.7           |  
|                                                                                      |      |                 |   |                 |  
| Tax effect
      of US GAAP adjustments                                             | (m)  | (68.6           | ) | (35.0           | )
|                                                                                      |      |                 |   |                 |  
|Shareholders
      equity in accordance with US GAAP                                 |      | 3,404.5         |   | 3,335.4         |  
|                                                                                      |      |                 |   |                 |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |         
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------
|(a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Pensions
|Under
      UK and US GAAP, pension costs are determined on a systematic basis over
      the length of service of employees. The group accounts for the costs of
      pensions under the rules set out in UK GAAP. US GAAP is more prescriptive
      in respect of the actuarial assumptions that must be used and the allocation
      of costs to accounting periods. Furthermore, the actuarial valuation under
      US GAAP must be carried out on an annual basis.

Under UK GAAP, the
  pension cost is calculated based upon the actuarys best estimate of the
  assumptions taken as a whole. The annual cost charged to the profit and loss
  account comprises the regular cost and variations. The regular cost is calculated
  so that it represents a reasonably stable percentage of pensionable payroll.
  Variations from the regular cost of providing pensions are generally spread
  over the expected remaining service lives of current employees in the scheme.

US GAAP requires
  each significant assumption to determine annual pension cost to be a best estimate
  with respect to that individual assumption. For example, the discount rate used
  should be that for AA rated bonds with a similar maturity to the
  pension obligations and the value of the scheme assets should be based upon
  market values at each balance sheet date. Whilst US GAAP also adopts a spreading
  approach to allocating variations, it is more restrictive. As a result, certain
  variations, for example refunds from the scheme, would be recognised immediately
  rather than being spread forward. US GAAP treats increases in pensions as a
  prior service cost and accordingly amortises its effects over the working lives
  of the members after the increase is awarded. UK GAAP encourages expected increases
  to be provided for in advance by being built into the actuarial assumptions.

US GAAP requires
  a liability, the minimum pension liability, to be recognised that is at least
  equal to the unfunded accumulated benefit obligation. The corresponding entries
  are to intangible assets, to the extent of unrecognised prior service cost,
  and other comprehensive income, a component of shareholders equity.

Under UK GAAP, the
  group has recognised a pre-paid pension cost of £401.2 million as at 31
  March 2005 (£97.0 million as at 31 March 2004). Under US GAAP, the group
  has recognised a pension prepayment of £178.7 million as at 31 March 2005
  (liability of £254.3 million, net of prepayment of £49.2 million,
  as at 31 March 2004), of which £172.0 million has been recorded within
  accumulated other comprehensive income as at 31 March 2005 (£302.0 million
  as at 31 March 2004). £nil has been recorded as an intangible asset at
  31 March 2005 (£1.5 million as at 31 March 2004).

|(b)                                                                                                                                                                                                                                                | Infrastructure
      renewals
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------
|Under
      UK GAAP, the charge to the profit and loss account for depreciation reflects
      the planned level of expenditure for infrastructure renewals. The charge
      is adjusted under US GAAP to reflect actual expenditure in the year.

Under UK GAAP, enhancement
  expenditure classified as infrastructure renewals expenditure is capitalised
  and depreciated in line with the policy on infrastructure renewals accounting.
  Under US GAAP, enhancement expenditure is capitalised and depreciated over its
  estimated useful life.

|(c)                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Depreciation
      of infrastructure assets
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------
|Under
      UK GAAP, the depreciation charge for infrastructure assets is the estimated
      level of annual expenditure required to maintain the operating capability
      of the network, which is based on the groups independently certified
      asset management plan. Under US GAAP, depreciation is charged on infrastructure
      assets using the straight-line method over a period of 100 years, being
      the estimated economic life.

|                                                                                          |                                       
|----------------------------------------------------------------------------------------- | --------------------------------------
|(d)                                                                                       | Provisions
            and liabilities
|Provision
      accounting under UK GAAP is the same as under US GAAP, except as follows:

Under UK GAAP, an
  investor is required to account for its proportionate share of net liabilities
  in a loss-making joint venture, even when there is no obligation to fund those
  liabilities. Where this is the case, an investors share of net liabilities
  of an investment is shown as a provision rather than a negative fixed asset.
  The group held within provisions £38.3 million at 31 March 2002 to reflect
  its proportionate share of net liabilities in IEBA, the Argentine electricity
  utility. In the year ended 31 March 2003, the group concluded it no longer has
  a participating interest in IEBA and has therefore ceased to account for the
  investment as a joint venture. This conclusion gave rise to a release of the
  share of net liabilities of IEBA held at 1 August 2002.

|   |                                                     
|-- | ----------------------------------------------------
|86 | United
      Utilities Annual Report & Accounts 2005

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Under US GAAP, an
  investor should discontinue recording losses of an investment when the investment
  has been reduced to zero, unless the investor has an obligation or commitment
  to fund those liabilities. As the group was not obligated or committed to funding
  the net liabilities of this investment, no such provision was recorded under
  US GAAP as at 31 March 2002. Consequently, the exceptional credit to the profit
  and loss account in the year ended 31 March 2003 from the withdrawal from IEBA
  did not arise under US GAAP since the provision was not recorded under US GAAP.

Under UK GAAP, restructuring
  charges are provided in full, from the date of the announcement of 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 different accounting
  periods compared with UK GAAP.

Under UK GAAP, a liability
      is recognised when there is a present obligation as a result of a past
      event, it is probable that a transfer of economic benefits will be required
      to settle the obligation and a reliable estimate can be made of the amount
      of the obligation. Liabilities are reviewed at each balance sheet date
      and adjusted to reflect the current best estimate of the obligation. If
      it is no longer probable that a transfer of economic benefits will be required
      to
      settle
      the obligation,
      the liability is reversed.

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.

|(e)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Capitalisation
      of interest
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------
|Under
      UK GAAP, the capitalisation of interest is not required and the group expenses
      interest charges to the profit and loss account 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.                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(f)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Goodwill                        
|Under
      UK GAAP, goodwill arising on acquisitions after 1 April 1998 is accounted
      for in accordance with FRS 10, Goodwill and Intangible Assets,
      and capitalised and amortised. Prior to that date, goodwill arising on acquisitions
      was, and remains, written off against shareholders equity in the year
      of the acquisition. On disposal or closure of all or part of a previously
      acquired business, any goodwill previously written off to reserves is included
      in calculating the profit or loss on disposal. Where capitalised goodwill
      is regarded as having a limited useful economic life, FRS 10 requires the
      cost to be amortised on a straight-line basis over that life, which generally
      does not exceed 20 years.

Goodwill previously
  written off to reserves in the years ended 31 March 2005, 2004 and 2003 of £nil,
  £nil and £0.9 million, respectively was released from reserves in
  relation to disposals under UK GAAP.

Under US GAAP, prior
  to 1 April 2002, all goodwill was recognised in the balance sheet and amortised
  to the profit and loss account over its estimated useful life not exceeding
  40 years. With effect from 1 April 2002, the group adopted SFAS 142, Goodwill
  and Other Intangible Assets. Under SFAS 142, the group is no longer required
  to amortise goodwill, including that related to investments in joint ventures
  and other intangible assets with indefinite lives, but will be required to subject
  these assets to periodic testing for impairment.

SFAS 142 establishes
  a method of testing goodwill 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, which is defined as an operating segment
  or one level below an operating segment. The first step is a screen for potential
  impairment and the second step measures the amount of impairment, if any, by
  determining the implied fair value of goodwill. The evaluation of impairment
  of existing goodwill in April 2004 indicated no impairment under US GAAP at
  that time. The group, in accordance with the provisions of SFAS 142, conducts
  impairment testing in April of each year or more frequently if there is an indication
  of impairment. Any impairments will be charged to the profit and loss account.

Under UK GAAP, in
  the year ended 31 March 2005, the profit on sale or termination of operations
  reflects the write off of goodwill net of accumulated amortisation. Under US
  GAAP, the profit on sale or termination of operations reflects the write off
  of goodwill net of accumulated amortisation, charged prior to the adoption of
  SFAS 142. Therefore the profit on sale or termination of operations is £1.4
  million lower under US GAAP.

Under US GAAP the
  gross goodwill adjustment as at 31 March 2005 was £1,042.8 million (£1,041.2
  million as at 31 March 2004). The accumulated amortisation adjustment under
  US GAAP as at 31 March 2005 was £140.4 million (£155.2 million as
  at 31 March 2004).

Goodwill amortisation
  including that related to investments in joint ventures under UK GAAP in the
  years ended 31 March 2005, 2004 and 2003 was £16.2 million, £8.8
  million and £7.5 million, respectively. Under US GAAP, goodwill amortisation
  was £nil in the years ended 31 March 2005, 2004 and 2003.

|(g)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Impairment of
      long-lived assets
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------
|Under
      UK GAAP, long-lived assets are assessed for impairment under FRS 11, Impairment
      of Fixed Assets and Goodwill, whenever events or circumstances indicate
      that an asset may be impaired. Any impairment is determined by comparing
      the carrying value of the asset with its recoverable amount, which is determined
      by reference to the estimated discounted cash flows to be generated from
      its use. The recoverable amount should be estimated, for an individual asset
      where reasonably practicable, otherwise at the level of an income generating
      unit. Dividing the total income of an entity into as many largely independent
      income streams as is reasonably practicable identifies income generating
      units. Generally, income generating units are smaller and at lower levels
      within the management structure than reporting units under SFAS 142. If
      the events or circumstances that triggered the impairment no longer exist,
      the impairment may be 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 and intangible assets with
  an indefinite life are assessed for impairment under SFAS 142 as discussed in
  note (f) above. 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 cash flows 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 cash flows.
  Under US GAAP, the restoration of a previously recognised impairment loss is
  not permitted.

In accordance with
  FRS 11, 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 adjustment to value of tangible assets of £1.6 million.
  Under US GAAP, there was no indication of impairment of the tangible assets
  on an undiscounted cash flow basis in accordance with SFAS 144. Under UK GAAP,
  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 cash
  flow basis in accordance with SFAS 144. In addition, no impairment of telecommunications
  goodwill under SFAS 142 was required, as stated in note (f) above due to the
  difference in asset groupings under UK GAAP (income generating units) and US
  GAAP (reporting units).

The tangible and
  definite-lived intangible assets continue to be depreciated under US GAAP resulting
  in a charge to the profit and loss account of £3.2 million and £3.3
  million in the years ending 31 March 2005 and 2004 respectively. There was no
  impairment of goodwill in 2005 or 2004 under UK or US GAAP.

|                                                     |   
|---------------------------------------------------- | --
|United
      Utilities Annual Report & Accounts 2005 | 87

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Financial statementsNotes to the accounts continued

|(h)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Derivatives and hedging
      activities    
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------
|Under
      UK GAAP, the group does not recognise derivatives at fair value on the balance
      sheet nor are mark-to-market amounts recorded in net income. Interest differentials
      on derivative instruments are charged to the profit and loss account as
      interest costs in the period in which they are realised. Changes in the
      market value of futures trading contracts are reflected in the profit and
      loss account in the period in which the change occurs. Monetary assets and
      liabilities denominated in foreign currencies that are hedged by a foreign
      currency derivative are translated using the contract rate in the hedging
      derivative.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Under
      US GAAP the group adopted SFAS 133, Accounting for Derivative Instruments
      and Hedging Activities (SFAS 133) on 1 April 2002. SFAS
      133 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 (as a component of other comprehensive income), depending on whether
      the derivative is designated as a hedge of changes in fair value or cash
      flows. For derivatives designated as fair value hedges, changes in fair
      value of the hedged item and the derivative are recognised currently in
      earnings. For derivatives designated as cash flow hedges, fair value changes
      of the effective portion of the hedging instrument are recognised in accumulated
      other comprehensive income on the balance sheet until the hedged item is
      recognised in earnings. The ineffective portion of the fair value changes
      are recognised in earnings immediately. Changes in the fair value of the
      underlying debt instruments are not recognised in net income or shareholders
      equity.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|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 cash flow type hedging instruments. Of the transition adjustment of £88.1
      million in accumulated comprehensive income, £79.2 million has been
      re-classified into earnings at 31 March 2005 (£67.1 million at 31 March 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|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 the transitional
      rules.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|The
      group currently does not designate any of its derivative instruments as
      hedges under SFAS 133. As a result, all derivative contracts have been recorded
      in the balance sheet at market value at the year end (with changes in fair
      value recorded in earnings) and all monetary assets and liabilities have
      been retranslated at spot rates. The groups earnings under US GAAP
      will be more volatile because of the effect of derivative instruments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|At
             31 March 2005 and 2004, the balance sheet includes current derivative
            assets
      of £152.4 million and £192.0 million, current derivative liabilities
       of £17.7 million and £23.2 million and non-current derivative
        liabilities of £255.8 million and £237.6 million, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Under
      UK GAAP, the group defers gains and losses on interest rate swaps that have
      been terminated over the period of the underlying debt that was originally
      hedged. Under US GAAP, all interest rate swaps are marked-to-market through
      earnings. Therefore the settlement of an interest rate swap has no further
      impact on reported earnings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(i)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Currency translation
      adjustments      
|Under
      UK GAAP, currency translation adjustments on net borrowings used to finance
      foreign investments are taken to the statement of total recognised gains
      and losses to offset the foreign exchange exposure on foreign investments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                             
|Under
      US GAAP, this offset is not available since the group elected not to designate
      any instruments as hedges in the year ended 31 March 2002. In the years
      ended 31 March 2005, 2004 and 2003, there was no currency translation adjustment
      resulting from the investment in IEBA since the investment had been reduced
      to zero.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                             
|(j)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Share compensation
      costs              
|Under
      UK GAAP, the groups UK Sharesave scheme is exempt from the requirement
      to recognise any compensation expense and is therefore accounted for as
      a non-compensatory plan. Compensation expense is recorded in respect of
      the executive share option schemes for the difference, if any, between the
      exercise price and the share price at the date of grant. Compensation expense
      is recorded for the performance share plan on a straight-line basis over
      the period in which performance is measured.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                             
|Under
      US GAAP, the group accounts for stock issued to employees in accordance
      with Accounting Principles Board Opinion No. 25 (APB 25), Accounting
      for Stock Issued to Employees. 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.                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Estimated
      compensation expense under UK GAAP for the performance share plan is recorded
      as a liability. Under US GAAP, compensation expense is recorded as a credit
      to shareholders equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(k)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Revenue and
      related profit recognition
|Under
      UK GAAP, non-refundable set up fees received from clients as a contribution
      to transition costs incurred at the commencement of a contract are offset
      against transition costs incurred, with any excess recognised as revenues
      over the period of the contract in line with forecast activity levels. Under
      US GAAP, non-refundable set up fees received at the commencement of a contract
      are deferred and recognised on a straight-line basis over the longer of
      the expected client relationship or contractual term.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                             
|Under
      UK GAAP, fixed fee elements within contractually defined revenues are recognised
      in the period in which services are billed in accordance with the pricing
      terms. Under US GAAP, the fixed fee elements are recognised on a straight-line
      basis over the period of the contract, unless evidence suggests that the
      revenue is earned or that obligations are fulfilled in a different pattern.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                             
|The
      reduction in revenue under US GAAP is £4.5 million in the year ended
      31 March 2005 (£8.6 million and £40.9 million in the years ended
      31 March 2004 and 2003, respectively).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                             
|Under
      UK GAAP, 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 may not be necessary due to the different revenue
      recognition policies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



|88 | United Utilities Annual
      Report & Accounts 2005
|-- | ----------------------------------------------------

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|(l)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Business
      combinations   
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------
|For
      business combinations, the purchase method of accounting is used for UK
      GAAP whereby 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.
      The group accounts for these business combinations on a consistent basis
      under US GAAP with the following exceptions:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Under
      UK GAAP, the group recognises intangible assets separately in a business
      combination only when they can be disposed of separately without disposing
      of the business of the entity and their value can be measured reliably on
      initial measurement. Under US GAAP, the group recognises acquired intangible
      assets apart from goodwill if (i) they arise from contracted or other legal
      rights even if the assets are not transferable or separable from the acquired
      entity or from other rights and obligations; or (ii) they are capable of
      being separated or divided from the acquired entity and sold, transferred,
      licensed, rented or exchanged. In connection with the business combination
      occurring in the year ended 31 March 2005, the assets acquired and liabilities
      assumed have been recorded based on the preliminary estimate of fair value
      on acquisition. Any change in the preliminary allocation will be reflected
      as an adjustment to goodwill. In connection with business combinations occurring
      in the year ended 31 March 2004, the group recognised intangible assets
      of £32.8 million under US GAAP, comprising customer relationships
      and customer lists which are amortised over their estimated useful lives.
      As at 31 March 2005, the net book value of intangible assets under US GAAP
      was £23.8 million, net of £9.0 million of accumulated amortisation.
      (2004: £32.2 million, net of £0.6 million accumulated amortisation).
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Under
      UK GAAP, the fair value of the consideration payable includes an estimate
      of amounts that are deferred or that are contingent upon the future revenues
      of the acquired entity. Under US GAAP, the contractual terms relating to
      the determination and payment of deferred and contingent consideration may
      cause elements of the total expected consideration to be treated as compensation
      cost for post acquisition services. This element is accrued over the relevant
      service period. In connection with business combinations occurring in the
      year ended 31 March 2004, the group recognised £4.3 million of contingent
      consideration as part of the purchase price of the acquired companies under
      UK GAAP. This was reduced to £2.7 million in the year ended 31 March
      2005, reflecting the revision made to goodwill following reassessment of
      the likelihood of contingent consideration targets being achieved. Under
      US GAAP, this contingent consideration will be recognised as compensation
      expense in future periods. In the year ended 31 March 2005, £0.6 million
      (2004: £nil) was recognised as compensation expense under US GAAP.                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                               
|(m)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Deferred
      taxes          
|Under
      UK GAAP, the group provides for deferred tax on a discounted basis in respect
      of timing differences that have originated but not reversed at the balance
      sheet date, where transactions or events that result in an obligation to
      pay more tax in the future or a right to pay less tax in the future have
      occurred at the balance sheet date. A net deferred tax asset is regarded
      as recoverable and therefore recognised only when, on the basis of available
      evidence, it is regarded as more likely than not that there will be suitable
      taxable profits against which to recover carried forward tax losses and
      from which the future reversal of underlying timing differences can be deducted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Under
      US GAAP, deferred taxation is provided for all temporary differences (differences
      between the carrying value of assets and liabilities and their corresponding
      tax bases) on a full liability basis. Certain items that are treated as
      permanent differences under UK GAAP are treated as temporary differences
      under US GAAP. Deferred tax assets are also recognised (net of a valuation
      allowance) to the extent that it is more likely than not that the benefit
      will be realised. Under US GAAP, discounting of deferred taxes is not permitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                               
|(n)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Dividends                     
|Under
      UK GAAP, the proposed dividends on ordinary and A shares, as recommended
      by the directors, are deducted from shareholders equity and shown
      as a liability in the balance sheet at the end of the period to which they
      relate. Under US GAAP, such dividends are only deducted from shareholders
      equity at the date of formal declaration of the dividend by the board of
      directors. Consequently dividends under US GAAP for the year ended 31 March
      2005 are £318.0 million (2004: £281.2 million, 2003: £262.4
    million).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                               
|(o)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Earnings
      per share (EPS)
|Under
            UK GAAP, basic EPS is based on the weighted average number of ordinary
            shares
      outstanding 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|The
      weighted average number of shares has been restated for periods prior to
      the rights issue, using an adjustment factor of 0.9176, based on the consideration
      received from the first stage of the rights issue. Further details are provided
      in note 10 of the consolidated financial statements. The same restatements
      are required under UK and US GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Under
      UK 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:

|                                                                                               | 2005                    |   | 2004                    |   | 2003       | 
|---------------------------------------------------------------------------------------------- | ----------------------- | - | ----------------------- | - | ---------- | 
|                                                                                               | As
            restated |   | As
            restated |   | Asrestated | 
|                                                                                               | million                 |   | million                 |   | million    | 
|                                                                                               |                         |   |                         |   |            | 
|Weighted average
      number of ordinary shares under US GAAP  basic EPS                     | 712.5                   |   | 662.8                   |   | 606.0      | 
|                                                                                               |                         |   |                         |   |            | 
|Common stock
      equivalents  dilutive share options                                        | 5.4                     |   | 3.9                     |   | 2.3        | 
|                                                                                               |                         |   |                         |   |            | 
|Number of A
      shares to be issued in 2005 (ordinary share equivalent)                      | 154.6                   |   | 82.8                    |   |            | 
|                                                                                               |                         |   |                         |   |            | 
|Number of A
      shares that would have been issued at fair value (ordinary share equivalent) | (83.3                   | ) | (53.6                   | ) |            | 
|                                                                                               |                         |   |                         |   |            | 
|Weighted average
      number of ordinary shares under US GAAP  diluted EPS                   | 789.2                   |   | 695.9                   |   | 608.3      | 
|                                                                                               |                         |   |                         |   |            | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                       
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------
|(p)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | New US accounting
      standards and pronouncements not yet effective
|FASB
      Statement No. 151 (SFAS 151), Inventory Costs issued
      in November 2004, provides guidance for accounting for abnormal amounts
      of idle facility expense, freight handling costs and spoilage and allocation
      of fixed production overhead. This accounting standard is applicable for
      accounting periods beginning after 15 June 2005 and will be adopted by the
      group from 1 April 2006. Adoption of SFAS 151 is not expected to have a
      material impact on the groups financial position, results of operations
      or cash flows.



|United
      Utilities Annual Report & Accounts 2005 | 89
|---------------------------------------------------- | --

---



Back to Contents

Financial statementsNotes to the accounts continued

|FASB Statement
      No 152 (SFAS 152), Accounting for Real Estate Time-Sharing
      Transactions, issued in December 2004, amends existing standards SFAS
      66, Accounting for Sales of Real Estate, and SFAS 67, Accounting
      for Costs and Initial Rental Operations of Real Estate Projects to
      make them consistent with AICPA Statement of Position 04-2, Accounting
      for Real Estate Time Sharing Transactions. This accounting standard
      is applicable for accounting periods beginning after 15 June 2005 and will
      be adopted by the group from 1 April 2006. Adoption of SFAS 152 is not expected
      to have a material impact on the groups financial position, results
      of operations or cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|FASB
      Statement No. 153 (SFAS 153), Exchange of Nonmonetary
      Assets issued in December 2004, is part of the IFRS convergence project.
      SFAS 153 edits the list of exceptions to entities required to prepare accounts
      on a non-going concern basis. This accounting standard is applicable for
      accounting periods beginning after 15 June 2005 and will be adopted by the
      group from 1 April 2006. Adoption of SFAS 153 is not expected to have a
      material impact on the groups financial position, results of operations
      or cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|FASB
      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. The group has not determined the effect,
      if any, of SFAS 123R on the groups financial position, results of
      operations or cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|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 will be effective as of 1 April 2005. The group has not determined
      the effect, if any, of FIN 47 on the groups financial position, results
      of operations or cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(q)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|In
      addition to the differences between UK 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
      profit and loss account and consolidated balance sheet. These classification
      differences have no impact on net income or shareholders equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Provisions
      for liabilities and charges                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Provisions
      for liabilities and charges under UK GAAP include £17.3 million (2004:
      £8.3 million) that are due within one year and which would be reclassified
      to current liabilities under US GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Grants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Under
      UK GAAP, grants (other than capital contributions towards infrastructure
      assets) are disclosed within deferred grants and contributions as creditors
      in the balance sheet. Under US GAAP, these amounts are classified differently
      and would be set against the assets to which they relate. Consequently £302.0
      million (2004: £298.1 million) would be classified within tangible
      fixed assets under US GAAP, rather than as a long-term liability under UK
      GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Exceptional
      items                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Under
             UK GAAP, exceptional items are material items that derive from events
            or
      transactions that fall within the ordinary activities of a reporting entity
             and which individually or, if of a similar type in aggregate, are
            required
      or expressly permitted to be disclosed by virtue of their size or incidence
             if the financial statements are to give a true and fair view. Exceptional

      items under UK GAAP in the year ended 31 March 2005 amount to a net charge
             of £21.1 million and comprise £29.7 million business
             restructuring  charges offset by £4.1 million profit on disposal
             of fixed assets  and £4.5 million profit on sale or termination
             of operations. Exceptional  items are discussed further on page
             17. In the years ended 31 March 2005,
      2004 and 2003, the profit on sale or termination of operations was disclosed
              as an exceptional item, after operating profit. In the years ended
             31 March
      2005 and 2004, the profit/loss on disposal of fixed assets was disclosed
              as an exceptional item, after operating profit.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Under
      US GAAP, all exceptional items would have been reflected within operating
      profit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Equity
      method investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Under
      UK GAAP, the share of joint ventures operating results excludes share
      of joint ventures interest and share of joint ventures tax.
      These amounts are included within Interest payable and similar charges
      and Taxation charge respectively. Under US GAAP, all of these
      amounts are included within Equity in earnings/(losses) of affiliates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Under
      UK GAAP, investments in joint ventures are classified under the heading
      investments within fixed assets. Under US GAAP, investments in joint ventures
      are classified as investments in equity affiliates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(r)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Under
      UK GAAP, the group complies with FRS 1 (Revised), Cash Flow Statements,
      the objective and principles of which are similar to those set out in SFAS
      95, Statement of Cash Flows. The principal difference between
      the two standards is in respect of classification. Under FRS 1 (Revised),
      the group presents its cash flows for (a) operating activities; (b) returns
      on investments and servicing of finance; (c) taxation; (d) capital expenditure
      and financial investment; (e) acquisitions and disposals; (f) equity dividends
      paid; (g) management of liquid resources; and (h) financing activities.
      SFAS 95 is less prescriptive and recognises only three categories of cash
      flow activity (a) operating; (b) investing; and (c) financing.                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Cash
      flows arising from taxation and returns on investments and servicing of
      finance under FRS 1 (Revised) would be included as operating activities
      under SFAS 95; dividend payments would be included as a financing activity
      under SFAS 95 and cash flows from capital expenditure, long-term investments,
      acquisitions and disposals would be included as investing activities under
      SFAS 95. In addition, under FRS 1 (Revised), cash represents cash at bank
      and in hand, less bank overdrafts; cash equivalents (i.e. liquid resources)
      are not included with cash. Movements of liquid resources are included under
      a separate heading. Under US GAAP, cash is not offset by bank overdrafts
      repayable within 24 hours from the date of the advance. Such overdrafts
      are classified within financing activities under US GAAP. Set out below
      is a summary consolidated statement of cash flows under US GAAP:                                                                                                                                                                                                                                                               



|90 | United Utilities Annual
      Report & Accounts 2005
|-- | ----------------------------------------------------

---



Back to Contents

|                                                | 2005   |    | 2004     |   | 2003   |  
|----------------------------------------------- | ------ | -- | -------- | - | ------ | -
|For
      the year ended 31 March               | £m     | £m | £m      
|                                                |        |    |          |   |        |  
|Net cash provided
      by operating activities | 465.8  |    | 770.3    |   | 635.4  |  
|                                                |        |    |          |   |        |  
|Net cash used
      in investing activities     | (866.8 | )  | (1,064.0 | ) | (694.9 | )
|                                                |        |    |          |   |        |  
|Net cash provided
      by financing activities | 407.2  |    | 297.3    |   | 78.9   |  
|                                                |        |    |          |   |        |  
|Effect of exchange
      rate changes on cash   | 0.7    |    |         |   | 0.2    |  
|                                                |        |    |          |   |        |  
|Net increase
      in cash                      | 6.9    |    | 3.6      |   | 19.6   |  
|                                                |        |    |          |   |        |  
|Cash at beginning
      of year                 | 42.1   |    | 38.5     |   | 18.9   |  
|                                                |        |    |          |   |        |  
|Cash at end
      of year                       | 49.0   |    | 42.1     |   | 38.5   |  
|                                                |        |    |          |   |        |  

Non-cash items of
  £4.8 million, £6.3 million and £4.9 million arose in the years
  ended 31 March 2005, 2004 and 2003, respectively, in relation to financing activities.

|(s) | Provision for
      doubtful debts
|--- | ----------------------------------

|                                       |                 |              |              |      |       |                 |       | 
|-------------------------------------- | --------------- | ------------ | ------------ | ---- | ----- | --------------- | ----- | 
|Balance                                |                 |              | Balance     
|at
      beginning                     | Additions       | Utilisations | at
      end
|For the year
      ended 31 March 2005 | of
      period | note         | (a)          | note | (b)   | of
      period
|                                       |                 |              |              |      |       |                 |       | 
|Provision for
      doubtful debts     | 107.8           |              | 40.8         |      | (21.4 | )               | 127.2 | 
|                                       |                 |              |              |      |       |                 |       | 
|For the year
      ended 31 March 2004 |                 |              |              |      |       |                 |       | 
|                                       |                 |              |              |      |       |                 |       | 
|Provision for
      doubtful debts     | 93.9            |              | 52.8         |      | (38.9 | )               | 107.8 | 
|                                       |                 |              |              |      |       |                 |       | 
|For the year
      ended 31 March 2003 |                 |              |              |      |       |                 |       | 
|                                       |                 |              |              |      |       |                 |       | 
|Provision for
      doubtful debts     | 70.6            |              | 52.1         |      | (28.8 | )               | 93.9  | 
|                                       |                 |              |              |      |       |                 |       | 
|                                       |                 |              |              |      |       |                 |       | 
|Note:                                  |                 |              |              |      |       |                 |       | 

|(a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Amounts
      charged to costs and expenses.                                                                                      
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------
|(b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Bad
      debt write offs and charges to allowances, net of other adjustments, re-classifications
      and exchange rate changes.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                   
|(t)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Presentation
      of financial information                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|In
      accordance with UK GAAP the group uses a three-column format for its consolidated
      profit and loss account that separates exceptional items that meet the definition
      of exceptional items under FRS 3, Reporting Financial Performance,
      and amortisation of goodwill from other costs. This presentation is permitted
      under UK GAAP and provides certain additional information in order to provide
      readers with an increased insight into the underlying performance of the
      business, in line with managements own view. The presentation of such
      subtotals is not permitted on the face of the financial statements under
      US GAAP. An explanation of these presentations is given below.                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Total
      operating profit before goodwill amortisation and exceptional items and
      profit before tax before goodwill amortisation and exceptional itemsTotal operating profit before goodwill amortisation and exceptional items
      is directly derived from the consolidated profit and loss account of the
      consolidated financial statements. Management believes this financial measure
      provides useful information to investors as it represents the total of the
      operating profits/losses for each segment, which is the measure that management
      uses to evaluate segmental 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. Management uses total segmental operating profits/losses to
      evaluate the trading performance of each segment, because management believes
      that the exclusion of goodwill amortisation (a non-cash item) and exceptional
      items (which, by virtue of their size or incidence, have been disclosed
      separately and may vary significantly each year) provides a more accurate
      comparison of annual segmental results, which in turn allows a better understanding
      of actual segmental trading performance.                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|In
      assessing the financial position and results of operations, management believes
      that providing additional measures under UK GAAP, which remove the positive
      and/or negative impact of exceptional items and the non-cash impact of goodwill
      amortisation, 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. The inclusions of total
      operating profit and total operating profit before goodwill amortisation
      and exceptional items and profit before tax and profit before tax before
      goodwill amortisation and exceptional items allows a complete analysis of
      both the core trading performance as well as the impact of these exceptional
      and non-cash items.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Under
      UK GAAP, exceptional items are material items that derive from events or
      transactions that fall within the ordinary activities of a reporting entity
      and which, individually, or, if of a similar type in aggregate, are required
      or expressly permitted to be disclosed by virtue of their size or incidence
      if the financial statements are to give a true and fair view.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Exceptional
      items, which are disclosed separately under UK GAAP in accordance with FRS
      3 Reporting Financial Performance, are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|For
      the year ended 31 March                            |       |      |      |   |       |  
|------------------------------------------------------------ | ----- | ---- | ---- | - | ----- | -
|2005                                                         | 2004  | 2003
|£m                                                           | £m    | £m  
|                                                             |       |      |      |   |       |  
|Operating exceptional
      items:                           |       |      |      |   |       |  
|Business restructuring                                       | (29.7 | )    | (4.6 | ) | (3.8  | )
|                                                             |       |      |      |   |       |  
|FRS 11 adjustment
      to carrying value of telecoms assets |      |      |     |   | (25.5 | )
|                                                             |       |      |      |   |       |  
|Non-operating
      exceptional items:                       |       |      |      |   |       |  
|Profit on sale
      or termination of operations            | 4.5   |      | 4.3  |   | 34.0  |  
|                                                             |       |      |      |   |       |  
|Profit/(loss)
      on disposal of fixed assets              | 4.1   |      | (2.4 | ) |      |  
|                                                             |       |      |      |   |       |  
|                                                             | (21.1 | )    | (2.7 | ) | 4.7   |  
|                                                             |       |      |      |   |       |  

|                                                     |   
|---------------------------------------------------- | --
|United
      Utilities Annual Report & Accounts 2005 | 91

---



Back to Contents

Financial statements******Notes
to the accounts continued**



Business restructuring
  costs in 2005 of £29.7 million mainly relate to the restructuring programme
  in licensed multi-utility operations in preparation for meeting its 2005-10
  efficiency challenges, in infrastructure management relating to the restructuring
  of the business units into market facing business streams, focusing on their
  specific risks, and in business process outsourcing, a restructuring to form
  a divisionalised structure to better reflect the markets in which the business
  operates. Business restructuring costs in 2004 of £4.6 million related
  to costs arising for the integration of the Eurocall business acquired by Your
  Communications. In 2003, severance costs of £3.8 million related to telecommunications.
  Business restructuring costs are considered to be exceptional items under UK
  GAAP as they are significant programmes for the businesses concerned. FRS 3
  therefore expressly permits disclosure of these costs as exceptional items within
  the income or expense heading to which they relate.

Under UK GAAP, the
  group performed an impairment review within its telecommunications business
  in accordance with FRS 11 in the year ended 31 March 2003. This resulted in
  an adjustment to value of £25.5 million, which was considered to be an
  exceptional item by virtue of its size and nature. FRS 3 therefore expressly
  permits disclosure of this adjustment as an exceptional item within the income
  or expense heading to which it relates.

The profit on sale
  or termination of operations relates to the groups withdrawal from various
  infrastructure management businesses. In the year ended 31 March 2003, the group
  concluded it no longer had a participating interest in IEBA, the Argentine utility
  for which United Utilities has been technical operator, and in which the group
  has a minority interest. It therefore ceased to account for the investment as
  a joint venture. The accounting provision that existed at 31 March 2002 in respect
  of the investment in Argentina was taken to the profit and loss account in 2003
  which, along with the disposal of US Water and costs associated with withdrawing
  from infrastructure management in the Americas, gave rise to an exceptional
  credit of £34.0 million. In 2004 and 2005, further credits were recognised
  relating to the withdrawal from infrastructure management in the Americas. In
  2005, the group disposed of its Green Energy business and reduced its shareholding
  in Manila Water Company through an initial public offering. FRS 3 requires that
  profits or losses on the sale or termination of an operation be shown separately
  on the face of the profit and loss account after operating profit and before
  interest.

The profit and loss
  on disposal of fixed assets in the years ended 31 March 2005 and 2004, respectively
  relate to the disposal of fixed asset investments. FRS 3 requires that profits
  or losses on the disposal of fixed assets be shown separately on the face of
  the profit and loss account after operating profit and before interest.

Although management
  uses these financial measures and the segmental analysis as shown in note 2
  of the consolidated financial statements to analyse trading performance, total
  operating profit and profit before tax should also be considered. Due to the
  presentation of these additional measures the condensed income statement in
  accordance with Article 10 of Regulation S-X based on UK GAAP amounts is presented
  below.

|                                                                                          | 2005    |   | 2004    |   | 2003    |  
|----------------------------------------------------------------------------------------- | ------- | - | ------- | - | ------- | -
|For
      the year ended 31 March                                                         | £m      |   | £m      |   | £m      |  
|                                                                                          |         |   |         |   |         |  
|Net sales and
      gross revenues                                                        | 2,253.9 |   | 2,060.0 |   | 1,878.8 |  
|                                                                                          |         |   |         |   |         |  
|Costs and expenses
      applicable to sales and revenues                                 | (931.9  | ) | (834.1  | ) | (733.7  | )
|                                                                                          |         |   |         |   |         |  
|Depreciation
      and amortisation                                                       | (381.4  | ) | (376.1  | ) | (356.9  | )
|                                                                                          |         |   |         |   |         |  
|Other operating
      costs                                                               | (136.2  | ) | (107.4  | ) | (87.5   | )
|                                                                                          |         |   |         |   |         |  
|Selling, general
      and administrative expenses                                        | (147.8  | ) | (130.8  | ) | (119.5  | )
|                                                                                          |         |   |         |   |         |  
|Provision for
      doubtful accounts and notes                                           | (40.8   | ) | (52.8   | ) | (52.1   | )
|                                                                                          |         |   |         |   |         |  
|Operating income                                                                          | 615.8   |   | 558.8   |   | 529.1   |  
|                                                                                          |         |   |         |   |         |  
|Non-operating
      income                                                                | 16.0    |   | 13.2    |   | 14.9    |  
|                                                                                          |         |   |         |   |         |  
|Interest and
      amortisation of debt discount and expense                              | (270.9  | ) | (237.6  | ) | (220.1  | )
|                                                                                          |         |   |         |   |         |  
|Income before
      income tax expense, minority interests and equity investees           | 360.9   |   | 334.4   |   | 323.9   |  
|                                                                                          |         |   |         |   |         |  
|Income tax expense                                                                        | (37.7   | ) | 27.5    |   | (45.7   | )
|                                                                                          |         |   |         |   |         |  
|Minority interests
      in income of consolidated entities                               | (1.8    | ) | (1.6    | ) | (2.3    | )
|                                                                                          |         |   |         |   |         |  
|Equity in earnings
      of unconsolidated entities and 50 per cent or less owned persons | 11.7    |   | 0.7     |   | 1.9     |  
|                                                                                          |         |   |         |   |         |  
|Net income                                                                                | 333.1   |   | 361.0   |   | 277.8   |  
|                                                                                          |         |   |         |   |         |  
|                                                                                          |         |   |         |   |         |  
|Basic earnings
      per share                                                            | 46.8p   |   | 54.5p   |   | 45.8p   |  
|                                                                                          |         |   |         |   |         |  
|Diluted earnings
      per share                                                          | 42.2p   |   | 52.1p   |   | 45.7p   |  
|                                                                                          |         |   |         |   |         |  

Net
  debtNet debt is a UK GAAP
  measure that is required to be disclosed in accordance with Financial Reporting
  Standard 1 Cash flow statements (revised 1996). Net debt is defined
  as borrowings (comprising debt, together with derivatives and obligations under
  finance leases) less cash and liquid resources.Management
  uses net debt, which is reconciled to gross debt in note 23 of the consolidated
  financial statements, 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.

|38 | RESTATEMENTS
        TO EARNINGS PER SHARE
|-- | ------------------------------------------

As described in note
  10 of the consolidated financial statements and note 37(o), earnings per share
  has been restated for all periods prior to the rights issue to reflect the bonus
  element of the rights issue, as required by FRS 14 under UK GAAP. The same adjustments
  are required under US GAAP.



|   |                                                     
|-- | ----------------------------------------------------
|92 | United
      Utilities Annual Report & Accounts 2005

---



Back to Contents

Information for shareholders******Selected
consolidated financial data**



The selected financial
  data set out below was 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, such consolidated financial
  statements and their accompanying notes. The selected financial data for the
  years ended 31 March 2005, 2004, 2003, 2002 and 2001 and as of 31 March 2005,
  2004, 2003, 2002 and 2001 as well as other information included elsewhere in
  this document are extracted from the groups 2005 and historical consolidated
  financial statements and related notes.

United Utilities
  prepares its consolidated financial statements in accordance with UK GAAP, which
  differs in certain respects from US GAAP. Included in note 37 to the consolidated
  financial statements are reconciliations of profit after taxation (or net income)
  and equity shareholders funds (or shareholders equity) and the companys
  financial position under UK GAAP and those under US GAAP.

During the year
  ended 31 March 2004, the group announced a five for nine rights issue to raise
  a total of £1 billion, structured so that the proceeds are received in
  two stages. On 26 August 2003, the rights issue was approved by shareholders
  at an extraordinary general meeting of United Utilities PLC, and authority was
  given for the issuance of up to 638,000,000 A shares of 50 pence each. 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 is expected to be received in June 2005, reflecting the
  subscription for further A shares. All A shares will then be consolidated and
  reclassified as ordinary shares on the basis of one ordinary share for two A
  shares.

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 Financial Reporting
  Standard No.14 Earnings per share. The same adjustments are required
  under US GAAP.

The discontinued
  operations within the selected financial data relate to the sale of the energy
  supply business in August 2000.

|Amounts in accordance
      with UK GAAP                   |                                                                         |       |          |        |          |         |          |        |          |        |          |        |  
|---------------------------------------------------------- | ----------------------------------------------------------------------- | ----- | -------- | ------ | -------- | ------- | -------- | ------ | -------- | ------ | -------- | ------ | -
|                                                           | 2005                                                                    | (1)   | 2005     |        | 2004     |         | 2003     |        | 2002     |        | 2001     |       
|                                                           |                                                                         | $     |          | £      |          | £       |          | £      |          | £      |          | £      |  
|Financial
      year ended 31 March                        | (in
      millions, except for information given per share and per ADS) |      
|                                                           |                                                                         |       |          |        |          |         |          |       
|Consolidated
      income statement data:                  |                                                                         |       |          |        |          |         |          |        |          |        |          |        |  
|Group turnover
      from continuing operations            | 4,259.8                                                                 |       | 2,253.9  |        | 2,060.0  |         | 1,878.8  |        | 1,786.2  |        | 1,490.9  |       
|                                                           |                                                                         |       |          |        |          |         |          |        |          |        |          |       
|Group turnover
      from discontinued operations(2)       |                                                                         |      |          |       |          |        |          |       |          |       |          | 201.5  |  
|                                                           |                                                                         |       |          |        |          |         |          |        |          |        |          |        |  
|Total group
      turnover                                 | 4,259.8                                                                 |       | 2,253.9  |        | 2,060.0  |         | 1,878.8  |        | 1,786.2  |        | 1,692.4  |       
|                                                           |                                                                         |       |          |        |          |         |          |        |          |        |          |       
|Net operating
      costs (before exceptional items)       | (3,025.9                                                                | )     | (1,601.0 | )      | (1,485.3 | )       | (1,339.5 | )      | (1,252.7 | )      | (1,177.7 | )     
|                                                           |                                                                         |       |          |        |          |         |          |        |          |        |          |       
|Operating exceptional
      items(3)                       |                                                                         | (56.1 | )        | (29.7  | )        | (4.6    | )        | (29.3  | )        | (11.9  | )        | (16.6  | )
|                                                           |                                                                         |       |          |        |          |         |          |        |          |        |          |        |  
|Group operating
      profit                               | 1,177.8                                                                 |       | 623.2    |        | 570.1    |         | 510.0    |        | 521.6    |        | 498.1    |       
|                                                           |                                                                         |       |          |        |          |         |          |        |          |        |          |       
|Share of operating
      profit of joint ventures          |                                                                         | 42.9  |          | 22.7   |          | 13.6    |          | 14.9   |          | 11.8   |          | 8.7    |  
|                                                           |                                                                         |       |          |        |          |         |          |        |          |        |          |        |  
|Non-operating
      exceptional items(3)                   |                                                                         | 16.3  |          | 8.6    |          | 1.9     |          | 34.0   |          |       |          | 191.2  |  
|                                                           |                                                                         |       |          |        |          |         |          |        |          |        |          |        |  
|Net interest
      payable and similar charges             | (536.9                                                                  | )     | (284.1   | )      | (248.1   | )       | (231.4   | )      | (230.6   | )      | (220.3   | )     
|                                                           |                                                                         |       |          |        |          |         |          |        |          |        |          |       
|Profit before
      tax                                    | 700.1                                                                   |       | 370.4    |        | 337.5    |         | 327.5    |        | 302.8    |        | 477.7    |       
|                                                           |                                                                         |       |          |        |          |         |          |        |          |        |          |       
|Tax (charge)/credit
      on profit on ordinary activities |                                                                         | (82.4 | )        | (43.6  | )        | 24.3    |          | (56.8  | )        | (39.4  | )        | (67.4  | )
|                                                           |                                                                         |       |          |        |          |         |          |        |          |        |          |        |  
|Exceptional
      tax credit/(charge)                      |                                                                         | 15.3  |          | 8.1    |          | 0.8     |          | 9.4    |          |       |          | (69.0) |  
|                                                           |                                                                         |       |          |        |          |         |          |        |          |        |          |        |  
|Profit after
      tax                                     | 633.0                                                                   |       | 334.9    |        | 362.6    |         | 280.1    |        | 263.4    |        | 341.3    |       
|                                                           |                                                                         |       |          |        |          |         |          |        |          |        |          |       
|Minority interest                                          |                                                                         | (3.4  | )        | (1.8   | )        | (1.6    | )        | (2.3   | )        | (1.6   | )        |       |  
|                                                           |                                                                         |       |          |        |          |         |          |        |          |        |          |        |  
|Profit after
      tax and minority interests              | 629.6                                                                   |       | 333.1    |        | 361.0    |         | 277.8    |        | 261.8    |        | 341.3    |       
|                                                           |                                                                         |       |          |        |          |         |          |        |          |        |          |       
|Dividends                                                  | (613.7                                                                  | )     | (324.7   | )      | (315.3   | )       | (264.8   | )      | (260.9   | )      | (254.9   | )     
|                                                           |                                                                         |       |          |        |          |         |          |        |          |        |          |       
|Retained profit
      for the financial year               |                                                                         | 15.9  |          | 8.4    |          | 45.7    |          | 13.0   |          | 0.9    |          | 86.4   |  
|                                                           |                                                                         |       |          |        |          |         |          |        |          |        |          |        |  
|Basic earnings
      per share(5)                          | $                                                                       | 0.88  |          | 46.8p  |          | 54.5p   |          | 45.8p  |          | 43.4p  |          | 56.8p  |  
|                                                           |                                                                         |       |          |        |          |         |          |        |          |        |          |        |  
|Diluted earnings
      per share(5)                        | $                                                                       | 0.80  |          | 42.2p  |          | 52.1p   |          | 45.7p  |          | 43.3p  |          | 56.5p  |  
|                                                           |                                                                         |       |          |        |          |         |          |        |          |        |          |        |  
|Dividend per
      ordinary share                          | $                                                                       | 0.86  |          | 45.42p |          | 44.31p  |          | 47.6p  |          | 47.0p  |          | 46.1p  |  
|                                                           |                                                                         |       |          |        |          |         |          |        |          |        |          |        |  
|Dividend per
      ADS(6)                                  | $                                                                       | 1.72  |          | 90.84p |          | 88.62p  |          | 95.2p  |          | 94.0p  |          | 92.2p  |  
|                                                           |                                                                         |       |          |        |          |         |          |        |          |        |          |        |  
|Dividend per
      A share(7)                              | $                                                                       | 0.43  |          | 22.71p |          | 22.155p |          | N/A    |          | N/A    |          | N/A    |  
|                                                           |                                                                         |       |          |        |          |         |          |        |          |        |          |        |  
|Re-presented
      dividend per ordinary                   |                                                                         |       |          |        |          |         |          |        |          |        |          |        |  
|share
      (post rights issue)(8)                         | $                                                                       | 0.86  |          | 45.42p |          | 44.31p  |          | 43.18p |          | 42.64p |          | 41.82p |  
|                                                           |                                                                         |       |          |        |          |         |          |        |          |        |          |        |  
|Average number
      of ordinary shares                    |                                                                         |       |          |        |          |         |          |        |          |        |          |        |  
|in
      issue  basic (million)(5)                        |                                                                         |       |          | 712.5  |          | 662.8   |          | 606.0  |          | 603.2  |          | 600.6  |  
|                                                           |                                                                         |       |          |        |          |         |          |        |          |        |          |        |  
|Average number
      of ordinary shares                    |                                                                         |       |          |        |          |         |          |        |          |        |          |        |  
|in
      issue  diluted (million)(5)                      |                                                                         |       |          | 789.2  |          | 693.5   |          | 607.7  |          | 605.1  |          | 603.4  |  
|                                                           |                                                                         |       |          |        |          |         |          |        |          |        |          |        |  

|                                                     |   
|---------------------------------------------------- | --
|United
      Utilities Annual Report & Accounts 2005 | 93

---



Back to Contents

Information for shareholdersSelected consolidated
  financial data continued

|                                                                   | 2005                                                                    | (1) | 2005       |   | 2004       |   | 2003       |   | 2002       |   | 2001       |  
|------------------------------------------------------------------ | ----------------------------------------------------------------------- | --- | ---------- | - | ---------- | - | ---------- | - | ---------- | - | ---------- | -
|As at 31 March                                                     | $m                                                                      |     | £m         |   | £m         |   | £m         |   | £m         |   | £m         |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Consolidated balance sheet data:                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Fixed assets                                                       | 15,936.5                                                                |     | 8,432.0    |   | 7,958.5    |   | 7,216.1    |   | 6,833.7    |   | 6,586.0    |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Current assets                                                     | 3,168.2                                                                 |     | 1,676.3    |   | 1,560.9    |   | 1,174.9    |   | 831.8      |   | 899.7      |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Total assets                                                       | 19,104.7                                                                |     | 10,108.3   |   | 9,519.4    |   | 8,391.0    |   | 7,665.5    |   | 7,485.7    |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Current liabilities                                                | (3,352.7                                                                | )   | (1,773.9   | ) | (1,383.1   | ) | (1,433.5   | ) | (1,358.6   | ) | (1,553.6   | )
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Long-term obligations                                              | (9,857.7                                                                | )   | (5,215.7   | ) | (5,033.4   | ) | (4,406.2   | ) | (3,772.5   | ) | (3,335.5   | )
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Net assets                                                         | 5,894.3                                                                 |     | 3,118.7    |   | 3,102.9    |   | 2,551.3    |   | 2,534.4    |   | 2,596.6    |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Share capital and share premium                                    | 3,316.8                                                                 |     | 1,754.9    |   | 1,734.9    |   | 1,230.8    |   | 1,227.5    |   | 1,209.5    |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Reserves and retained profits                                      | 2,575.1                                                                 |     | 1,362.5    |   | 1,348.4    |   | 1,302.8    |   | 1,291.7    |   | 1,373.5    |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Equity shareholders funds                                         | 5,891.9                                                                 |     | 3,117.4    |   | 3,083.3    |   | 2,533.6    |   | 2,519.2    |   | 2,583.0    |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Minority interest                                                  | 2.4                                                                     |     | 1.3        |   | 19.6       |   | 17.7       |   | 15.2       |   | 13.6       |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Capital employed                                                   | 5,894.3                                                                 |     | 3,118.7    |   | 3,102.9    |   | 2,551.3    |   | 2,534.4    |   | 2,596.6    |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|                                                                  
|Financial year                                                     | 2005                                                                    | (1) | 2005       |   | 2004       |   | 2003       |   | 2002       |   | 2001       |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Other financial data:                                              |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Ratio of earnings to fixed charges(10)                             |                                                                         |     | 2.1x       |   | 2.2x       |   | 2.3x       |   | 2.3x       |   | 2.3x       |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Net leverage(11)                                                   |                                                                         |     | 57%        |   | 53%        |   | 57%        |   | 55%        |   | 52%        |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Amounts in accordance with US GAAP                                 |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|                                                                   | 2005                                                                    | (1) | 2005       |   | 2004       |   | 2003       |   | 2002       |   | 2001       |  
|                                                                   | Asrestated                                                              |     | Asrestated |   | Asrestated |   | Asrestated |   | Asrestated |   | Asrestated |  
|                                                                   | $                                                                       |     | £          |   | £          |   | £          |   | £          |   | £          |  
|Financial year ended 31 March                                      | (in millions,
      except for information given per share and per ADS) |    
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Consolidated income statement data:                                |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Group turnover(12)(13)                                             | 4,245.5                                                                 |     | 2,246.3    |   | 2,048.4    |   | 1,841.8    |   | 1,786.8    |   | 1,692.4    |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Net operating costs(13)                                            | (3,118.5                                                                | )   | (1,650.0   | ) | (1,518.2   | ) | (1,330.5   | ) | (1,296.3   | ) | (1,235.1   | )
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Operating profit from continuing operations                        |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|before interest
             and tax(4)(13)                        | 1,127.0                                                                 |     | 596.3      |   | 530.2      |   | 511.3      |   | 490.5      |   | 436.5      |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Operating profit from discontinued operations                      |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|before interest
      and tax(2)                                   |                                                                        |     |           |   |           |   |           |   |           |   | 20.8       |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Profit on disposal of business                                     |                                                                        |     |           |   |           |   |           |   |           |   | 167.0      |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Net interest payable(13)                                           | (481.2                                                                  | )   | (254.6     | ) | (175.8     | ) | 5.3        |   | (293.4     | ) | (164.7     | )
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Profit before tax from continuing
      operations(13)             | 645.8                                                                   |     | 341.7      |   | 354.4      |   | 516.6      |   | 197.1      |   | 275.8      |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Profit before tax from discontinued
      operations(2)            |                                                                        |     |           |   |           |   |           |   |           |   | 183.8      |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Tax charge on profit on ordinary
      activities(13)              | (168.6                                                                  | )   | (89.2      | ) | (94.6      | ) | (111.2     | ) | (84.3      | ) | (252.0     | )
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Profit after tax from continuing
      operations(13)              | 477.2                                                                   |     | 252.5      |   | 259.8      |   | 405.4      |   | 112.8      |   | 82.4       |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Profit after tax from discontinued
      operations(2)             |                                                                        |     |           |   |           |   |           |   |           |   | 125.2      |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Minority interest                                                  | (3.4                                                                    | )   | (1.8       | ) | (1.6       | ) | (2.3       | ) | (1.6       | ) |           |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Profit after tax and minority interests
      from                 |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|continuing
      operations(13)                                    | 473.8                                                                   |     | 250.7      |   | 258.2      |   | 403.1      |   | 111.2      |   | 82.4       |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Profit after tax and minority interests
      from                 |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|discontinued
      operations(2)                                   |                                                                        |     |           |   |           |   |           |   |           |   | 125.2      |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Profit after tax and minority
      interests(13)                  | 473.8                                                                   |     | 250.7      |   | 258.2      |   | 403.1      |   | 111.2      |   | 207.6      |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Basic earnings per share from
      continuing operations(5) (9)   | $0.66                                                                   |     | 35.2p      |   | 39.0p      |   | 66.5p      |   | 18.4p      |   | 13.7p      |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Basic earnings per share from
      discontinued operations(5) (9) |                                                                        |     |           |   |           |   |           |   |           |   | 20.8p      |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Basic earnings per share                                           | $0.66                                                                   |     | 35.2p      |   | 39.0p      |   | 66.5p      |   | 18.4p      |   | 34.5p      |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Diluted earnings per share from
      continuing operations(5)     | $0.60                                                                   |     | 31.8p      |   | 37.1p      |   | 66.3p      |   | 18.4p      |   | 13.7p      |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Diluted earnings per share from
      discontinued operations(5)   |                                                                        |     |           |   |           |   |           |   |           |   | 20.8p      |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Diluted earnings per share                                         | $0.60                                                                   |     | 31.8p      |   | 37.1p      |   | 66.3p      |   | 18.4p      |   | 34.5p      |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|Average number of ordinary shares                                  |                                                                         |     |            |   |            |   |            |   |            |   |            |  
|in issue 
      diluted (million)(5)                              |                                                                         |     | 789.2      |   | 695.9      |   | 608.3      |   | 605.1      |   | 601.9      |  
|                                                                   |                                                                         |     |            |   |            |   |            |   |            |   |            |  



|94 | United Utilities Annual
      Report & Accounts 2005
|-- | ----------------------------------------------------

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|                                             |                           |     |                           |   |                           |   |            |   |            |   |            |  
|-------------------------------------------- | ------------------------- | --- | ------------------------- | - | ------------------------- | - | ---------- | - | ---------- | - | ---------- | -
|                                             | 2005                      | (1) | 2005                      |   | 2004                      |   | 2003       |   | 2002       |   | 2001       |  
|                                             | As
              restated |     | As
              restated |   | As
              restated |   | Asrestated |   | Asrestated |   | Asrestated |  
|As at 31
      March                         | $m                        |     | £m                        |   | £m                        |   | £m         |   | £m         |   | £m         |  
|Consolidated balance
      sheet data:       |                           |     |                           |   |                           |   |            |   |            |   |            |  
|Fixed assets(13)                             | 18,159.5                  |     | 9,608.2                   |   | 9,070.8                   |   | 8,289.8    |   | 7,826.9    |   | 7,553.5    |  
|                                             |                           |     |                           |   |                           |   |            |   |            |   |            |  
|Current assets                               | 3,035.7                   |     | 1,606.2                   |   | 1,655.9                   |   | 1,495.7    |   | 1,032.8    |   | 910.0      |  
|                                             |                           |     |                           |   |                           |   |            |   |            |   |            |  
|Total assets                                 | 21,195.2                  |     | 11,214.4                  |   | 10,726.7                  |   | 9,785.5    |   | 8,859.7    |   | 8,463.5    |  
|                                             |                           |     |                           |   |                           |   |            |   |            |   |            |  
|Current liabilities(13)                      | (2,891.9                  | )   | (1,530.1                  | ) | (1,382.3                  | ) | (1,290.2   | ) | (1,251.4   | ) | (1,483.4   | )
|                                             |                           |     |                           |   |                           |   |            |   |            |   |            |  
|Long-term obligations(13)                    | (11,866.3                 | )   | (6,278.5                  | ) | (5,989.4                  | ) | (5,679.9   | ) | (4,717.5   | ) | (3,894.1   | )
|                                             |                           |     |                           |   |                           |   |            |   |            |   |            |  
|                                             | 6,437.0                   |     | 3,405.8                   |   | 3,355.0                   |   | 2,815.4    |   | 2,890.8    |   | 3,086.0    |  
|                                             |                           |     |                           |   |                           |   |            |   |            |   |            |  
|Capital stock                                | 1,353.6                   |     | 716.2                     |   | 711.8                     |   | 556.5      |   | 555.9      |   | 552.9      |  
|                                             |                           |     |                           |   |                           |   |            |   |            |   |            |  
|Share premium account                        | 1,963.1                   |     | 1,038.7                   |   | 1,023.1                   |   | 674.3      |   | 671.6      |   | 656.6      |  
|                                             |                           |     |                           |   |                           |   |            |   |            |   |            |  
|Reserves and
      retained profits(13)      | 3,117.8                   |     | 1,649.6                   |   | 1,600.5                   |   | 1,566.9    |   | 1,648.1    |   | 1,862.0    |  
|                                             |                           |     |                           |   |                           |   |            |   |            |   |            |  
|Shareholders equity                         | 6,434.5                   |     | 3,404.5                   |   | 3,335.4                   |   | 2,797.7    |   | 2,875.6    |   | 3,071.5    |  
|                                             |                           |     |                           |   |                           |   |            |   |            |   |            |  
|Minority interest                            | 2.5                       |     | 1.3                       |   | 19.6                      |   | 17.7       |   | 15.2       |   | 14.5       |  
|                                             |                           |     |                           |   |                           |   |            |   |            |   |            |  
|                                             | 6,437.0                   |     | 3,405.8                   |   | 3,355.0                   |   | 2,815.4    |   | 2,890.8    |   | 3,086.0    |  
|                                             |                           |     |                           |   |                           |   |            |   |            |   |            |  
|                                             |                           |     |                           |   |                           |   |            |   |            |   |            |  
|Financial year                               |                           |     | 2005                      |   | 2004                      |   | 2003       |   | 2002       |   | 2001       |  
|                                             |                           |     |                           |   |                           |   |            |   |            |   |            |  
|Other financial data:                        |                           |     |                           |   |                           |   |            |   |            |   |            |  
|Ratio of earnings
      to fixed charges(10) |                           |     | 1.8x                      |   | 2.1x                      |   | 2.8x       |   | 1.7x       |   | 2.1x       |  
|                                             |                           |     |                           |   |                           |   |            |   |            |   |            |  

|(1) | US dollar
      amounts have been translated from sterling at the rate of £1.00 =
      $1.89, the noon buying rate on 31 March 2005. These translations are not
      representations that pounds have been, could have been, or can in the future
      be converted into US dollars at this or any other rate of exchange and are
      solely for the convenience of the reader.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Discontinued
      operations relate to the sale of the energy supply business in August 2000.                                                                                                                                                                                                                                                                                      
|(3) | Exceptional
      items, which are disclosed separately under UK GAAP in accordance with FRS
      3 Reporting Financial Performance, comprise:                                                                                                                                                                                                                                   

|                                                             |       |     |       |   |      |   |       |   |       |   |       |  
|------------------------------------------------------------ | ----- | --- | ----- | - | ---- | - | ----- | - | ----- | - | ----- | -
|                                                             | 2005  | (1) | 2005  |   | 2004 |   | 2003  |   | 2002  |   | 2001  |  
|Financial
      year                                         | $m    |     | £m    |   | £m   |   | £m    |   | £m    |   | £m    |  
|                                                             |       |     |       |   |      |   |       |   |       |   |       |  
|UK GAAP                                                      |       |     |       |   |      |   |       |   |       |   |       |  
|Business restructuring                                       | (56.1 | )   | (29.7 | ) | (4.6 | ) | (3.8  | ) | (11.9 | ) | (16.6 | )
|                                                             |       |     |       |   |      |   |       |   |       |   |       |  
|FRS 11 adjustment to
      carrying value of telecoms assets |      |     |      |   |     |   | (25.5 | ) |      |   |      |  
|                                                             |       |     |       |   |      |   |       |   |       |   |       |  
|Profit on sale or termination
      of operations            | 8.5   |     | 4.5   |   | 4.3  |   | 34.0  |   |      |   |      |  
|                                                             |       |     |       |   |      |   |       |   |       |   |       |  
|Profit on disposal of
      the energy supply business       |      |     |      |   |     |   |      |   |      |   | 191.2 |  
|                                                             |       |     |       |   |      |   |       |   |       |   |       |  
|Profit/(loss) on disposal
      of fixed assets              | 7.7   |     | 4.1   |   | (2.4 | ) |      |   |      |   |      |  
|                                                             |       |     |       |   |      |   |       |   |       |   |       |  
|                                                             | (39.9 | )   | (21.1 | ) | (2.7 | ) | 4.7   |   | (11.9 | ) | 174.6 |  
|                                                             |       |     |       |   |      |   |       |   |       |   |       |  

Further details of exceptional
  items under UK GAAP are given on page 17.



|United
      Utilities Annual Report & Accounts 2005 | 95
|---------------------------------------------------- | --

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Information for shareholdersSelected consolidated
  financial data continued

|(4) | Operating
      profit from continuing operations before interest and tax is stated after
      the items from continuing operations scheduled below. The following table
      sets out the US GAAP equivalent to UK GAAP exceptional items (i.e. the restructuring
      charges, the profit on disposal of the energy supply business, the profit
      on sale or termination of operations, adjustment to the value of telecommunications
      assets and the profit or loss on disposal of fixed assets) from continuing
      and discontinued operations:
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                        | 2005  | (1) | 2005  |   | 2004 |   | 2003  |   | 2002  |   | 2001  |  
| | ------------------------------------------------------ | ----- | --- | ----- | - | ---- | - | ----- | - | ----- | - | ----- | -
| | Financial
      year                                   | $m    |     | £m    |   | £m   |   | £m    |   | £m    |   | £m    |  
| |                                                        |       |     |       |   |      |   |       |   |       |   |       |  
| | US GAAP                                                |       |     |       |   |      |   |       |   |       |   |       |  
| | Continuing operations:                                 |       |     |       |   |      |   |       |   |       |   |       |  
| |                                                        |       |     |       |   |      |   |       |   |       |   |       |  
| | Business restructuring                                 | (60.1 | )   | (31.8 | ) | (2.4 | ) | (3.8  | ) | (11.9 | ) | (16.6 | )
| |                                                        |       |     |       |   |      |   |       |   |       |   |       |  
| | Profit on sale or termination
      of operations      | 5.9   |     | 3.1   |   | 4.3  |   | (4.3  | ) |      |   |      |  
| |                                                        |       |     |       |   |      |   |       |   |       |   |       |  
| | Currency translation
      adjustment                  |      |     |      |   |     |   | (6.8  | ) | (41.3 | ) |      |  
| |                                                        |       |     |       |   |      |   |       |   |       |   |       |  
| | Profit/(loss) on disposal
      of fixed assets        | 7.7   |     | 4.1   |   | (2.4 | ) |      |   |      |   |      |  
| |                                                        |       |     |       |   |      |   |       |   |       |   |       |  
| |                                                        | (46.5 | )   | (24.6 | ) | (0.5 | ) | (14.9 | ) | (53.2 | ) | (16.6 | )
| |                                                        |       |     |       |   |      |   |       |   |       |   |       |  
| | Discontinued operations:                               |       |     |       |   |      |   |       |   |       |   |       |  
| |                                                        |       |     |       |   |      |   |       |   |       |   |       |  
| | Profit on disposal of
      the energy supply business |      |     |      |   |     |   |      |   |      |   | 167.0 |  
| |                                                        |       |     |       |   |      |   |       |   |       |   |       |  
| |                                                        |      |     |      |   |     |   |      |   |      |   | 167.0 |  
| |                                                        |       |     |       |   |      |   |       |   |       |   |       |  

|    | The amount
      for profit or loss on disposal of fixed assets is the same under UK and
      US GAAP, for the years ended 31 March 2005 and 2004, as are the profit on
      sale or termination of operations for the year ended 31 March 2004 and business
      restructuring for the years ended 31 March 2003, 2002 and 2001. For business
      restructuring the increase under US GAAP of £2.1 million in the year
      ended 31 March 2005 and the reduction of £2.2 million in the year
      ended 31 March 2004 relate to costs being recognised in different accounting
      periods. The profit on sale or termination of operations for the year ended
      31 March 2005 reduced by £1.4 million under US GAAP, as the carrying
      value of goodwill, included in the profit and loss account as a realised
      cost of disposal, is higher under US GAAP as goodwill has not been amortised
      since adoption of SFAS 142 on 1 April 2002.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    | For the
      profit on sale or termination of operations in the year ended 31 March 2003,
      the reduction under US GAAP of £38.3 million related to the provision
      at 31 March 2002 that reflected the groups share of net liabilities
      in IEBA, the Argentine utility. In the year ended 31 March 2003, the group
      concluded it no longer had a participating interest and therefore ceased
      to account for the investment as a joint venture, with the resulting release
      of the £38.3 million share of liabilities included within provisions
      under UK GAAP. Under US GAAP, no share of liabilities was recorded at 31
      March 2002, as an investor should discontinue recording losses of an investment
      when the investment has been reduced to zero unless the investor has an
      obligation or commitment to fund these liabilities.                                                                            
|   
|    | The currency
      translation adjustments under US GAAP relate to Argentina. Under UK GAAP,
      currency translation adjustments on net borrowings used to finance foreign
      investments are taken to the statement of total recognised gains and losses
      to offset the foreign exchange exposure. Under US GAAP, this offset is not
      available since the group elected not to designate derivative instruments
      as hedges. In the year ended 31 March 2003, there was no currency translation
      adjustment resulting from the investment in IEBA, because the investment
      had been reduced to zero at 31 March 2002.                                                                                                                                                                                                                                                                                                                    
|   
|    | Under UK
      GAAP, the group performed an impairment review within its telecommunications
      business in accordance with FRS 11 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 cash flow basis
      in accordance with SFAS 144. In addition, no impairment of goodwill under
      SFAS 142 was required.                                                                                                                                                                                                                                                                          
|   
|    | The reduction
      under US GAAP on profit on disposal of the energy supply business in August
      2000 of £24.2 million related to a £36.0 million difference
      in the onerous contract provisions released on disposal due to the application
      of discounting under UK GAAP offset by £11.8 million due to the lower
      carrying value of goodwill under US GAAP which had been amortised. Under
      UK GAAP, goodwill had previously been written off to reserves, but on disposal
      it is included in the profit and loss account as a realised cost of disposal.                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(5) | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|    | 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 FRS 14 Earnings per share. The same treatment is required
      under US GAAP. The adjustment factor applied to the basic and diluted weighted
      average number of shares is based on the consideration received from the
      first stage of the rights issue. The adjustment factor is 0.9176, 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.                                                                                                                                                                                                                                                                                
|   
|    | The adjustment
      factor of 0.9176 is calculated as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         



| | Theoretical
      ex-rights fair value per share                                                       | = | 487.70 | = | 0.9176
| | ------------------------------------------------------------------------------------------------------ | - | ------ | - | ------
| |                                                                                                        |   |        |   |       
| | Fair
      value per share immediately before exercise of rights                                       |   | 531.5  |   |       
| |                                                                                                        |   |        |   |       
| | 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           |   |        |  
| |                                                                                                        |   |        |   |       
| | =
      (556.8 million ordinary shares x 531.5 pence) + (309.3 million A shares
      x 165 pence) (*) | = | 487.70 |  
| |                                                                                                        |   |        |  
| | 556.8
      million ordinary shares + 309.3 million A shares(*)                                        |   |        |  



|    | (*)                                                                                                                                                                            | The A shares
      have been treated as part paid ordinary shares, two A shares being equivalent
      to one ordinary share.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -----------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                               
|(6) | Calculated
      based on a ratio of two ordinary shares to one ADS.                                                                                                          
|    |                                                                                                                                                                               
|(7) | The
      first dividend for which the initial A shares ranked was the 2003/04 interim
      dividend; the amount of the A share dividend is 50 per cent of that paid
      on



|96 | United Utilities Annual
      Report & Accounts 2005
|-- | ----------------------------------------------------

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|     | an
    ordinary share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(8)  | Dividends per ordinary share for periods prior to the rights issue have been re-presented for comparative purposes to take account of the bonus element of the first stage of the
rights issue. The factor applied to the prior period dividend per share is 0.9072, calculated using 576.0 pence per ordinary share, the closing price on 25 July 2003, the last business day prior to the announcement of the rights
issue.                                                                                                                                                                                                                                                                              
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(9)  | 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 UK GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(10) | 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 and profits or losses from joint ventures 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.                                                                                                   
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(11) | Net
           leverage is defined as net debt (loans and related derivatives, finance
           leases and overdrafts less cash at bank and in hand and managed funds
           and short-term investments) as a percentage of net debt plus equity
           shareholders funds. Net debt is a UK GAAP measure, required by FRS 1 (Revised) Cash Flow Statements,
           but is considered a non-GAAP measure for the purpose of US GAAP as
           discussed on page
15.                                                                                                                                                                                                                   
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(12) | The
           difference between group turnover in 2005, 2004 and 2003 under US
           GAAP of £2,249.4 million, £2,051.4 million and £1,837.9 million, respectively and group
turnover under UK GAAP of £2,253.9 million, £2,060.0 million and £1,878.8 million, respectively is due to the revenue recognition difference between UK and US GAAP of £4.5 million (2004: £8.6 million, 2003: £40.9
million) as shown in note 37(k) of the summary of differences between UK and
US GAAP.                                                                                                                                                                                                             
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(13) | Net income
           and shareholders’ equity under US GAAP have been restated to
           reflect the translation of loans at spot rates instead of the contract
           rates, the reinstatement of liabilities that have yet to be legally
           extinguished, the amendment to certain fair value of derivative valuations,
           the amendment to enhancement expenditure classified as infrastructure
           renewals that is capitalised under US GAAP and the consequential impact
           on taxes, as disclosed in note 37 to the consolidated financial statements.
           This resulted in the following (increase)/decrease in the amounts
    previously reported:



|Financial year ended 31
        March     |  |  | 2005 |   |  | 2004  |   |  | 2003  |   |  | 2002  |   |  | 2001 |  
|----------------------------------------- |  |  | ---- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ---- | -
|                                          |  |  | £m   |   |  | £m    |   |  | £m    |   |  | £m    |   |  | £m   |  
|                                          |  |  |      |   |  |       |   |  |       |   |  |       |   |  |      |  
|Group turnover                            |  |  | 3.1  |   |  | 3.0   |   |  | (3.9  | ) |  | (0.6  | ) |  |     |  
|                                          |  |  |      |   |  |       |   |  |       |   |  |       |   |  |      |  
|Net operating costs                       |  |  | (0.6 | ) |  | 7.5   |   |  | 9.3   |   |  | 26.8  |   |  | 14.0 |  
|                                          |  |  |      |   |  |       |   |  |       |   |  |       |   |  |      |  
|Net interest payable                      |  |  | (6.6 | ) |  | 84.3  |   |  | (31.2 | ) |  | (83.1 | ) |  |     |  
|                                          |  |  |      |   |  |       |   |  |       |   |  |       |   |  |      |  
|Tax charge on ordinary
        activities |  |  | 3.1  |   |  | (26.6 | ) |  | 5.4   |   |  | 16.7  |   |  | (4.2 | )
|                                          |  |  |      |   |  |       |   |  |       |   |  |       |   |  |      |  
|                                          |  |  |      |   |  |       |   |  |       |   |  |       |   |  |      |  

|At 31 March            |  |  | 2005  |   |  | 2004  |   |  | 2003  |   |  | 2002  |   |  | 2001  |  
|---------------------- |  |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | -
|                       |  |  | £m    |   |  | £m    |   |  | £m    |   |  | £m    |   |  | £m    |  
|                       |  |  |       |   |  |       |   |  |       |   |  |       |   |  |       |  
|Fixed assets           |  |  | (61.2 | ) |  | (61.8 | ) |  | (54.3 | ) |  | (45.0 | ) |  | (18.2 | )
|                       |  |  |       |   |  |       |   |  |       |   |  |       |   |  |       |  
|Short term obligations |  |  | (26.2 | ) |  | (23.1 | ) |  | (20.1 | ) |  | (24.0 | ) |  | (24.6 | )
|                       |  |  |       |   |  |       |   |  |       |   |  |       |   |  |       |  
|Long term obligations  |  |  | (54.9 | ) |  | (33.6 | ) |  | (91.3 | ) |  | (65.5 | ) |  | (0.9  | )
|                       |  |  |       |   |  |       |   |  |       |   |  |       |   |  |       |  
|                       |  |  |       |   |  |       |   |  |       |   |  |       |   |  |       |  
|Shareholders’ equity   |  |  | 19.9  |   |  | (5.1  | ) |  | 57.1  |   |  | 44.5  |   |  | 5.5   |  
|                       |  |  |       |   |  |       |   |  |       |   |  |       |   |  |       |  
|                       |  |  |       |   |  |       |   |  |       |   |  |       |   |  |       |  



|United Utilities Annual Report & Accounts 2005 | 97
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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 is 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      |  | 2005  |  | 2004   |  | 2003  |  | 2002                     | 
|Pence per share                                                   | (i)       |  | p     |  | p      |  | p     |  | p                        | 
|                                                                  |           |  |       |  |        |  |       |  |                          | 
|Interim dividend per ordinary share                               |           |  | 14.79 |  | 14.43  |  | 15.50 |  | 15.30                    | 
|                                                                  |           |  |       |  |        |  |       |  |                          | 
|Final dividend per ordinary share                                 |           |  | 30.63 |  | 29.88  |  | 32.10 |  | 31.70                    | 
|                                                                  |           |  |       |  |        |  |       |  |                          | 
|Total dividend per ordinary share                                 |           |  | 45.42 |  | 44.31  |  | 47.60 |  | 47.00                    | 
|                                                                  |           |  |       |  |        |  |       |  |                          | 
|Total dividend per A share                                        |           |  | 22.71 |  | 22.155 |  | N/A   |  | N/A                      | 
|                                                                  |           |  |       |  |        |  |       |  |                          | 
|                                                                  |           |  |       |  |        |  |       |  |                          | 
|US $ per share                                                    | (i)       |  | $     |  | $      |  | $     |  | $                        | 
|                                                                  |           |  |       |  |        |  |       |  |                          | 
|Interim dividend per ordinary share                               |           |  | 0.28  |  | 0.27   |  | 0.25  |  | 0.22                     | 
|                                                                  |           |  |       |  |        |  |       |  |                          | 
|Final dividend per ordinary share                                 |           |  | 0.58  |  | 0.53   |  | 0.51  |  | 0.45                     | 
|                                                                  |           |  |       |  |        |  |       |  |                          | 
|Total dividend per ordinary share                                 |           |  | 0.86  |  | 0.80   |  | 0.76  |  | 0.67                     | 
|                                                                  |           |  |       |  |        |  |       |  |                          | 
|Total dividend per A share                                        |           |  | 0.43  |  | 0.40   |  | N/A   |  | N/A                      | 
|                                                                  |           |  |       |  |        |  |       |  |                          | 
|Total dividend per ADS($)                                         | (i), (ii) |  | 1.72  |  | 1.60   |  | 1.52  |  | 1.34                     | 
|                                                                  |           |  |       |  |        |  |       |  |                          | 
|                                                                  |           |  |       |  |        |  |       |  |                          | 
|The exchange rates at the dividend payment dates were as follows: |           |  |       |  |        |  |       |  |                         
|                                                                  |           |  | 2005  |  | 2004   |  | 2003  |  | 2002                     | 
|                                                                  |           |  |       |  |        |  |       |  |                          | 
|Exchange rate at interim payment date                             |           |  | 1.86  |  | 1.86   |  | 1.63  |  | 1.42                     | 
|                                                                  |           |  |       |  |        |  |       |  |                          | 
|Exchange rate at final payment date                               | (iii)     |  | 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 is expected to be received in June 2005, reflecting
the subscription for further A shares. All A shares will then be 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
stage of the rights issue. The factor applied to dividends for the periods prior to the rights issue is 0.9072, calculated using 576.0 pence per ordinary share, this 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      |  | 2005  |  | 2004  |  | 2003  |  | 2002                     | 
|Pence per ordinary share                 | (i)       |  | p     |  | p     |  | p     |  | p                        | 
|                                         |           |  |       |  |       |  |       |  |                          | 
|Interim (re-presented)                   |           |  | 14.79 |  | 14.43 |  | 14.06 |  | 13.88                    | 
|                                         |           |  |       |  |       |  |       |  |                          | 
|Final (re-presented)                     |           |  | 30.63 |  | 29.88 |  | 29.12 |  | 28.76                    | 
|                                         |           |  |       |  |       |  |       |  |                          | 
|Total (re-presented)                     |           |  | 45.42 |  | 44.31 |  | 43.18 |  | 42.64                    | 
|                                         |           |  |       |  |       |  |       |  |                          | 
|                                         |           |  |       |  |       |  |       |  |                          | 
|US $ per ordinary share                  | (i)       |  | $     |  | $     |  | $     |  | $                        | 
|                                         |           |  |       |  |       |  |       |  |                          | 
|Interim (re-presented)                   |           |  | 0.28  |  | 0.27  |  | 0.23  |  | 0.20                     | 
|                                         |           |  |       |  |       |  |       |  |                          | 
|Final (re-presented)                     |           |  | 0.58  |  | 0.53  |  | 0.46  |  | 0.41                     | 
|                                         |           |  |       |  |       |  |       |  |                          | 
|Total (re-presented)                     |           |  | 0.86  |  | 0.80  |  | 0.69  |  | 0.61                     | 
|                                         |           |  |       |  |       |  |       |  |                          | 
|Total dividend per ADS($) (re-presented) | (i), (ii) |  | 1.72  |  | 1.60  |  | 1.38  |  | 1.22                     | 
|                                         |           |  |       |  |       |  |       |  |                          | 

|      
|------
|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 10 per cent
        of the sum of the net dividend and the associated UK tax credit). For
        further information, see the Taxation section
on page 101.

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.

|98 | United Utilities Annual Report & Accounts 2005
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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 101.

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
= $1.89, 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 2005. The noon buying rate on 31 March
2005 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      | 
|               |       |  |       |  |          |    |            | 

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

|Month    | High  |  | Low   | 
|-------- | ----- |  | ----- | 
|         |       |  |       | 
|2004     |       |  |       | 
|         |       |  |       | 
|December | $1.95 |  | $1.91 | 
|         |       |  |       | 
|2005     |       |  |       | 
|         |       |  |       | 
|January  | $1.91 |  | $1.86 | 
|         |       |  |       | 
|February | $1.92 |  | $1.86 | 
|         |       |  |       | 
|March    | $1.93 |  | $1.87 | 
|         |       |  |       | 
|April    | $1.92 |  | $1.87 | 
|         |       |  |       | 
|May      | $1.90 |  | $1.82 | 
|         |       |  |       | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|On
    1 June 2005, the noon buying rate was US$1.81 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 2.2 million consumer premises.
           For more information on these licences see Economic regulation of wastewater and water on pages 6 and 7 and Economic regulation of electricity
distribution on pages 8 and 9.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



|United Utilities Annual Report & Accounts 2005 | 99
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Useful information for shareholders continued

|(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 US$350,000,000 6.25 per cent notes due 15
            August 2005, and US$400,000,000 6.875 per cent notes due15 August
            2028 under two indentures 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 5.375 per cent notes due 1 February 2019
            under the US Programme. As at 31 March 2005, a total of US$1,850,000,000
            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.

Directors
  A 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.

A director shall be capable
      of being appointed or re-elected 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 re-appointment 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 re-appointment by the companys shareholders at the meeting at which
  they are
  required to retire.

SharesThe
              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. The holders
              of the A shares shall be entitled, contemporaneously with any payment
              of dividend to the holders of ordinary shares, to be paid rateably
              with the holders of ordinary shares a dividend for each A share which
              is equal to one-half of the dividend to be paid to the holder of
an ordinary share.

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. The holders of the A shares shall be entitled
      to share rateably with the holders of the ordinary shares in the distribution
      of profits or assets (if any) to the holders of ordinary shares on the
      basis of a distribution with respect to each A share which is equal to
one-half of the distribution to the holder of an ordinary share.

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. 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. The holders of A shares are entitled to receive notice of
      any general meeting of the company and to attend, speak or vote at such
      general meeting on the same basis as the holder of ordinary shares provided
      that each holder of A shares on a poll shall have only one vote for every
two A shares held.

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.

|    |                                               
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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.

General meetings21
            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. 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 in either case 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, 10 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.

For taxes withheld at source,
  the Treaty is effective from 1 May 2003. Holders should however note that any
  person that is or would have been entitled to greater benefits under the Old
  Treaty than under the Treaty may be able to elect to have the provisions of
      the Old Treaty apply in their entirety for a period of twelve months from
      the date
  on which the Treaty would otherwise have effect. 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.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Taxation
    of dividends                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|United
    Kingdom                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|There
            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 10 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 Utilities Annual
          Report & Accounts 2005 | 101

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Useful information for shareholders continued

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 2003 or 2004 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 2005 taxable year.
If
an eligible US holder qualified for benefits under the Old Treaty, then such
holder may be eligible, subject to generally
applicable limitations, to receive a special US foreign tax credit equal to one-ninth
of the amount of certain cash dividends that such holder receives on the ordinary
shares or ADSs, so long as such holder makes an election to include in income,
as an additional notional dividend, an amount equal to the tax credit. This foreign
tax credit is generally only available with respect to dividends paid before
1 May 2003, unless such holder elects to apply the Old Treaty in its entirety
for a period
of 12 months from the effective date of the Treaty.

Taxation of capital gains 
United 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.

|    |                                               
|--- | ----------------------------------------------
|102 | United Utilities Annual Report & Accounts 2005

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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
  the
  London office of the Bank of New York (BONY), as Depositary under a Deposit
   Agreement dated 28 January 1998 between the company, BONY 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) | High
      (US$)             
|                          |                             |               |                              
|Financial year
      2001 | 639.8                       |               | 489.4                        
|                          |                             |               |                              
|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                        
|                          |                             |               |                              
|December 2004             | 633.0                       |               | 571.5                        
|                          |                             |               |                              
|January 2005              | 651.0                       |               | 627.0                        
|                          |                             |               |                              
|February 2005             | 662.5                       |               | 619.0                        
|                          |                             |               |                              
|March 2005                | 631.0                       |               | 598.5                        
|                          |                             |               |                              
|Financial year
      2006 |                             |               |                              
|                          |                             |               |                              
|April 2005                | 650.0                       |               | 623.5                        
|                          |                             |               |                              
|May 2005                  | 683.0                       |               | 640.0                        
|                          |                             |               |                              

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 are due to be 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, IL. 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 web site
  at http://www.sec.gov.

|                                                     |    
|---------------------------------------------------- | ---
|United
      Utilities Annual Report & Accounts 2005 | 103

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**Useful information
  for shareholders continued**



OTHER USEFUL INFORMATION
  FOR SHAREHOLDERSKey events
  for shareholders*The
  company is holding its 2005 annual general meeting on Friday, 29 July 2005 at
  the Bridgewater Hall, Manchester, England. It will start at 11.00 am. 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:***
|-------------------------------------------------
|                                                 
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|                                                 
|•                                                
|                                                 
|•                                                
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|•                                                
|                                                 
|•                                                
|                                                 
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Keeping you in the
  pictureYou
  can find more information about United Utilities quickly and easily on the United
  Utilities web site. In addition to the annual report and accounts, the corporate
  responsibility report and other reports, company announcements are also published
  on the web site, including the interim and preliminary results announcements
  and associated presentations. www.unitedutilities.com

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 Ian Priestner, group director of communications, at Dawson House,
  Great Sankey, Warrington WA5 3LW (telephone: +44 (0) 1925 237000; email: ian.priestner@uuplc.co.uk).

Copies of the separate
  regulatory accounts for the year ended 31 March 2005 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 Julie McGowan in the group secretariat on +44 (0) 1925 237000, or alternatively
  they are available on the web site.

Enquiring about
  your shareholdingIf 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
  web site 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 web site 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 8-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 accountThe 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 effectivelyYou can now buy or
  sell our ordinary and A shares using Lloyds TSB Registrars low cost share
  dealing service (telephone: +44 (0) 870 850 0852) or deal online at www.shareview.co.uk/dealing

Holding your shares
  tax efficientlyThe 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 schemeMany 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 web site at www.sharegift.org

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. The Bank of New York is the depositary
  and its address for enquiries is The Bank of New York, Shareholder Relations,
  PO Box 11258, Church Street Station, New York NY 10286 1258 (telephone:
  1 (888) BNY-ADRS (US toll free) or outside the US, 1 610 382 7836) or visit
  the web site at www.adrbny.com

American Depositary
  Receipt 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 the Bank of New
  York. Other shareholders can obtain a copy of the annual report on form 20-F
  from Julie McGowan in the group secretariat on +44 (0)1925 237000, or alternatively
  the report is available on the web site.

Avoiding unsolicited
  mailThe 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 at www.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 web site www.unitedutilities.com

|    |                                                     
|--- | ----------------------------------------------------
|104 | United
      Utilities Annual Report & Accounts 2005

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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 2005 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 managementand
                advisorsNot applicable
        -Item
                2  Offer statistics and expected timetableNot applicable
        -Item
                3  Key informationSelected
                financial data
        93-97Risk
                factors
        29-31Item
                4  Information on the company
        4-14History
                and development of the company
        4Business
                overview
        4-14Organisational
                structure
        4Property,
                plant and equipment
        13Item
                5  Operating and financial review and prospects
        3,
                    15-29Executive
                overview
        2-3Operating
                and financial performance review
        15-22Liquidity
                and capital resources
        22-25Research
                and development, patents and licences
        28Off-balance
                sheet arrangements
        25Contractual
                obligations
        23-24Safe
                harbor
        29Item
                6  Directors, senior management and employeesDirectors
                and senior management biographies
        33-34Compensation
        37-48Non-executive
                directors terms of appointment
        37-38Executive
                directors contracts of service
        48Remuneration
                committee
        37Audit
                committee
        52Employees
        35Directors'
                share interests
        35-37Employee
                involvement and employee share schemes
        37Item
                7  Major shareowners and related party transactionsMajor
                shareowners
        36Related
                party transactions
        84Item
                8  Financial information (see Item 17)Differences
                in UK/NYSE corporate governance practices
        49-54Dividends
        98Litigation
        31Significant
                changes
        28Item
                9  The offer and listingHistory
                of stock price
        103Markets
        4Item
                10  Additional informationMemorandum
                and articles of association
        100Material
                contracts
        99Exchange
                controls
        99Taxation
        101-102Documents
                on display
        103Subsidiary
                information
        70


PagesItem
                11  Quantitative and qualitativedisclosure
                about market risk
        23-24Item
                12  Description of securities otherthan
                equity securitiesNot applicable
        -Item
                13  Defaults, dividend arrearages and delinquenciesNone
        -Item
                14  Material modifications to the rightsof
                security holders and the use of proceedsNoneItem
                15  Controls and procedures
        51Item
                16  [Reserved]
        -Item
                16A  Audit committee financial expert
        52Item
                16B  Code of ethics
        32Item
                16C  Principal accountant fees and services
        53Item
                16D  Exemptions from listing standardsfor
                audit committeesNot applicableItem
                16E  Purchases of equity securitiesby
                the issuer and affiliated purchasersNot applicable
        -Item
                17  Financial StatementsReport
                of independent registered public accounting firm
        55Consolidated
                profit and loss account
        56Balance
                sheets
        57Consolidated
                cash flow statement
        58Reconciliation
                of net cash flow to movement in net debt
        58Statement
                of total recognised gains and losses
        58Reconciliations
                of movements in equity shareholders' funds
        59Notes
                to the accounts
        60-84Summary
                of differences between accounting principles generally accepted
                in the United Kingdom and the United States of America
        85-92Item
                18  Financial statementsNot applicable
        -Item
                19  Exhibits
        107-108


|United
            Utilities Annual Report & Accounts 2005 | 105
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| | Glossary                                                                                                                                                                                                                                                                                                                             |                                                                          | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------ | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Term used in annual
      report on Form 20-F                                                                                                                                                                                                                                                                                        | US equivalent or brief
      description                                 | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | A shares                                                                                                                                                                                                                                                                                                                             | Common stock/share of
      50 pence each                                | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Accounts                                                                                                                                                                                                                                                                                                                             | Financial statements                                                     | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Acquisition method of
      accounting                                                                                                                                                                                                                                                                                               | Purchase accounting                                                      | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Allotted                                                                                                                                                                                                                                                                                                                             | Issued                                                                   | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Called-up share capital                                                                                                                                                                                                                                                                                                              | Ordinary and A shares,
      issued and fully paid                       | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Capital allowances                                                                                                                                                                                                                                                                                                                   | Tax term equivalent
      to US tax depreciation allowances              | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Class of business                                                                                                                                                                                                                                                                                                                    | Industry segment                                                         | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Creditors                                                                                                                                                                                                                                                                                                                            | Accounts payable/payables                                                | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Creditors: amounts falling
      due after more than one year                                                                                                                                                                                                                                                                        | Long-term liabilities                                                    | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Creditors: amounts falling
      due within one year                                                                                                                                                                                                                                                                                 | Current liabilities                                                      | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Debtors                                                                                                                                                                                                                                                                                                                              | Accounts receivable/receivables                                          | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Depreciation                                                                                                                                                                                                                                                                                                                         | Amortisation                                                             | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Finance lease                                                                                                                                                                                                                                                                                                                        | Capital lease                                                            | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Employee share option                                                                                                                                                                                                                                                                                                                | Employee stock option                                                    | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Equity shareholders
      funds                                                                                                                                                                                                                                                                                                     | Stockholders equity                                                     | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Financial year                                                                                                                                                                                                                                                                                                                       | Fiscal year                                                              | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Fixed asset investments                                                                                                                                                                                                                                                                                                              | Long-term investments                                                    | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Freehold                                                                                                                                                                                                                                                                                                                             | Ownership with absolute
      rights in perpetuity                       | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Freehold land                                                                                                                                                                                                                                                                                                                        | Land owned                                                               | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Gearing                                                                                                                                                                                                                                                                                                                              | Leverage                                                                 | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Group, or consolidated,
      accounts                                                                                                                                                                                                                                                                                               | Consolidated financial
      statements                                  | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Interest receivable                                                                                                                                                                                                                                                                                                                  | Interest income                                                          | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Interest payable                                                                                                                                                                                                                                                                                                                     | Interest expense                                                         | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Nominal value                                                                                                                                                                                                                                                                                                                        | Par value                                                                | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Ordinary share                                                                                                                                                                                                                                                                                                                       | Common stock/share of
      £1.00 each                                   | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Pension scheme                                                                                                                                                                                                                                                                                                                       | Pension plan                                                             | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Profit                                                                                                                                                                                                                                                                                                                               | Income (or earnings)                                                     | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Profit and loss account
      (reserve)                                                                                                                                                                                                                                                                                              | Retained earnings                                                        | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Profit and loss account                                                                                                                                                                                                                                                                                                              | Income statement                                                         | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Reconciliation of movements
      in equity shareholders funds                                                                                                                                                                                                                                                                      | Statement of changes
      in stockholders equity                       | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Reserves                                                                                                                                                                                                                                                                                                                             | Stockholders equity
      other than capital stock                      | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Share capital                                                                                                                                                                                                                                                                                                                        | Shares, capital stock
      or common stock issued and fully paid        | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Share premium account                                                                                                                                                                                                                                                                                                                | Premiums paid in excess
      of par value                               | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Shares                                                                                                                                                                                                                                                                                                                               | unless further defined,
      both A shares and ordinary shares together | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Shares in issue                                                                                                                                                                                                                                                                                                                      | Shares outstanding                                                       | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Stocks                                                                                                                                                                                                                                                                                                                               | Inventories/operating
      stocks                                       | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Tangible fixed assets                                                                                                                                                                                                                                                                                                                | Property, plant and
      equipment                                      | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Turnover                                                                                                                                                                                                                                                                                                                             | Revenues (or sales)                                                      | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
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| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | 2005 Annual
      Report on Form 20-F text printed on Revive Silk containing at least 75%
      de-inked and chlorine free genuine post-consumer waste, and Soporset Premium
      Offset made from ECF pulp sourced from certified sustainable forests. These
      materials are manufactured from mills accredited with ISO14001. |                                                                         
| |                                                                                                                                                                                                                                                                                                                                      |                                                                          | 
| | Designed
            and produced by Black Sun Plc +44 (0) 207 736 0011. Printed by Butler & Tanner.                                                                                                                                                                                                                                 |                                                                          | 



|106 | United Utilities Annual
      Report & Accounts 2005
|--- | ----------------------------------------------------

---

Back to Contents
    ITEM 19 - EXHIBITS
    1.1 The articles
        of association of United Utilities PLC. 2.1 The
        deposit agreement between United Utilities PLC, the Bank of New York
        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, filed
        on 23 January 1998 and incorporated by reference into this Form 20-F. 2.2 Amended
        and restated trust deed dated 3 October 2003 relating to the€5
        billion 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. 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. 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 1 April 2005. 4.2 Electricity
          Distribution Licence– standard
  conditions. 4.3 Electricity
        Distribution Licence for Norweb plc (now called United Utilities Electricity)– standard
        licence conditions from 1 April 2005. 4.4 Notice
        under Section 11A (2) & (3) of the Electricity Act 1989, proposing
        to modify the Electricity Distribution Licence. 4.5 Trust
        deed by and between United Utilities Electricity PLC and the Law Debenture
        Trust Corporation p.l.c. dated 3 August 1995 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. 4.6 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. 4.7 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. 4.8 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. 4.9 Executive
        directors’ service contracts for John Roberts, 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. 4.10 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. 4.11 Rules
        of the United Utilities PLC Performance Share Plan. 4.12 Executive
        director’s service contract for Tom Drury. 4.13 Electricity
        Distribution Licence for United Utilities Electricity PLC amendment to
        special licence conditions effective 1 April 2005. 4.14 Rules
        of the United Utilities International Performance Share Plan. 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.   Back to Contents
  9.2 Not
  Applicable. 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. CERTIFICATION Pursuant 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/...John Roberts.................
  John Edward Roberts
  Chief executive
  Dated: 9 December 2005


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| |  |  |  |                                                                                                                                                                 |  |                                                                                             | 
| |  |  |  | United Utilities PLC
      Dawson House
      Great Sankey
      Warrington
      WA5 3LWTelephone +44 (0)
      1925 237000Facsimile +44 (0)
      1925 237073 |  | Registered in England and
      WalesRegistered number
      2366616www.unitedutilities.com | 
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