United Utilities Group PLCCredit Investor Update

Summer 2018

Contents

2

UU Overview 3-9• Where we operate 4

• Investment proposition 5

• Behaving responsibly 9

• Environmental, Social and Governance 10

Operational performance 11-18• 5-year lead on Systems Thinking 14

• Totex outperformance 15

• Sharing outperformance 16

• Net regulatory capex profile 18

ODIs 19-26• ODI target 20

• ODI performance 21

• PR19 ODIs 24-26

Customer performance 27-30• Customer satisfaction 28-29

• Bad debt and cash collection 30

Financial performance 31-43• Income statement movements 32-39

• Financial position movements 40-42

• Cash flow statement 43

Financial resilience 44-49• Credit ratings 45

• Pensions 46-47

• RCV and gearing 48-49

Financing and hedging 50-60• Financing as at 31 March 2018 51

• Impact of RPI inflation 52

• Cost of debt 53

• Hedging 54-56

• Debt structure and maturity profile 57-60

Economic regulation – PR14 61-69• Ofwat’s legal duties 62

• PR14 - WACC 64

Economic regulation – Water 2020 & PR19 70-75• Water 2020 – structure of new price controls 71

• PR19 – WACC 72

• PR19 – summary of final methodology 73

• PR19 timetable 75

Cautionary statement 76

UU Overview

Where we operate

4

Regulated UK water and wastewater business

3.2 million household

and non-household customer premises

Regional population of

around 7 million

Investment proposition

5

Wholesale revenue and asset base linked to RPI inflation through to at least 2020

Management team with extensive commercial, operational and regulatory experience

Track record of regulatory outperformance; exceeded our 2010-15 targets

Clear vision to be the best water company in the UK, providing great service to our customers

Clarity on allowed returns through to 2020

Water Plus Non-Household Retail JV with Severn Trent - first mover advantage, well placed to compete

Significant improvements in operational performance and customer service

Low cost of debt locked in and robust capital structure with a stable A3 rating

Dividend policy targeting annual growth of at least RPI inflation through to 2020

Our vision is to be the best UK water and wastewater company

Deliver long-term shareholder value by providing:

6

Shareholder value driven by regulatory outperformance:

The best service to customers

At the lowest sustainable cost

In a responsible manner

Totex

Operational

Financing

Capital structureRobust and sustainable

7

Moody’s has an A3 rating with a Stable outlook

S&P has an A- rating with a Stable outlook

Target gearing range of 55% to 65% supports robust capital

structure

Financingheadroom into

2020

Average term to maturity of debt portfolio of just under 20 years

Dividends2015-20 policy targets sustainable growth

8

2017/18 full year dividend of

39.73 pence per ordinary

share

RPI based on November from

prior year -mirrors RPI in

price limits

Increase of 2.2%, in line with 2015-20

dividend policy

Consistent with growth in regulatory

capital value

Target growth rate of at least RPI each year to 2020, from 2014/15 base

Recognise importance of

income to shareholders

Behaving responsiblyLeading on corporate governance

9

Approach to affordability and vulnerability setting new benchmarks

Sharing outperformance with customers; c£500m over AMP5 and AMP6

Ofwat self-assured for reporting; one of only three companies

and the only listed company

Early adopters of new standards; recognition through awards

Leading position on pensions

Securing long-term operational and financial resilience

ESGStrong environmental, social and governance credentials

10

Aim to deliver the highest levels of corporate governance, consistent with principles of the UK Corporate Governance Code

July 2018, retained Industry Leading Company four star status in the Environment Agency’s annual assessment

Drinking water quality improved again to the best it has ever been

Retained our World Class rating in the Dow Jones Sustainability Index for the tenth consecutive year

Consistently met or outperformed our regulatory leakage targets

By 2020, aim to reduce carbon footprint by 50% compared with 2005/06 baseline, and on track to do so (33% reduction so far)

Generated 167 gigawatt hours in renewable energy, up 12% on 2016/17, equivalent to 21% of annual electricity consumption

Operationalperformance

Ideally placed to meet the challenges

12

United Utilities is ideally placed to meet these challenges.

We have the long-term plans in place to improve resilience and enhance service and quality, underpinned by our use of innovation and technology.

The industry faces many challenges

United Utilities is now a leader among the WASCs

We have a clear vision and a long-term strategy and the capabilities to

deliver both

Environmental Affordability ReputationalResilience

OverviewDelivering for customers, shareholders and the environment

13

Sharing overall outperformance through

additional investment; increased to £250m

Systems Thinking setting new benchmarks for the

sector

£100m totex outperformance

Final AMP6 ODI position expected to be inpositive reward

territory

Sector leading financial resilience

5-year lead on Systems ThinkingOur use of data and technology and our innovative Systems Thinking approach is setting new benchmarks for the industry

We are quick adopters of new technology and our Innovation

Lab approach facilitates rapid development and deployment of

new ideas

14

Resilience Efficiency

Service

Delivering sustained improvements

in service, resilience and

efficiency

Systems Thinking helped ensure our resilience to cope with increased demand

through freeze thaw event

No significant deterioration in service

Record snow

depths followed by

a rapid thaw

Event Recognition in Water Network (ERWAN)

Machine Learning - a self learning system that learns the ‘normal’ system signature within our water network and sends an alert as soon as

it sees a deviation. One case study reduced the duration of supply interruption to customers by 42%

Robotic process automation

Eliminating the cost of many manual activities

Wastewater network management

Pilot results show a 49%reduction in totex and a 70%improvement in service

£100m totex outperformanceDriving efficiency into the capital programme through changing our delivery model, harnessing innovation and embracing the digital world.

15

Systems Thinking has fundamentally changed the way that we operate and reduces totex whilst also improving service.

Resilience Efficiency

Service

Sharing outperformance through additional £250m investmentAdditional investment increased from £100m to £250m delivering industry leading, long-term resilience in water and future proofing bills for the benefit of customers

Covering of all filters & chambers downstream of first stage filters

Installation of Shut down and Start up facilities at ALL WTWs

Robust service reservoir assessments & repair

Engineer led HAZREV completed at highest risk sites, with ALL WTWs on track for completion

UV installed at WTWs and ability to deploy it everywhere underway

16

Resilience Efficiency

Service

Risk reduction through replacement of 1.5km of Haweswater Aqueduct most at risk

Sector leading performanceSignificant and sustained improvement leading the industry

17

Resilience Efficiency

Service

Industry leading 4* status with the Environment Agency

Lowest number of pollution incidents; frontier in sector

Best-in-sector on self-reporting

Best ever drinking water quality

Sector leading resilience6.21

6.37

6.48

6.71

6.98

7.04

7.07

7.31

7.35

Thames Water

Severn Trent

South West Water

Northumbrian Water

Anglian Water

Yorkshire Water

Wessex Water

Southern Water

United Utilities

Wholesaler performance

Wholesaler performance in business retail marketSource: Utility Week / Water.Retail research

Net regulatory capital spend profile

18

NB. The UU AMP6 investment programme shown on this chart does not constitute a forecast and is subject to change

400

500

600

700

800

900

2015/16 2016/17 2017/18 2018/19 2019/20

£m

UU capex FD assumed capex

Outcome deliveryincentives

ODIs – AMP6

Continued solid improvement in operational performance – now on track to deliver a cumulative reward for the period

20

+£140m

+£50m +£30m +£30m +£30m

-£100m

-£70m-£50m

£0m

Continually reduced

downside risk

-£470m

Outcome Delivery Incentives (ODIs)

Reward/(Penalty) (£m)

2017/18 Yrs 1-3

Reliable water service index (23.9)(8.0)

Average minutes supply lost per property (6.0)(6.0)

Water quality service index (3.6) (7.0)

Total leakage at or below target9.1

Thirlmere transfer to West Cumbria 0.0 0.0

Private sewers service index7.4 22.1

Wastewater category 3 pollution incidents3.3 9.8

Other 12 wholesale ODIs (0.1) (1.9)

Total wholesale ODIs (7.0) 2.2

21

0.0

West Cumbria strategyDriving innovation through planning, procurement and stakeholder management to target ODI reward

22

Project driver

• European Habitats directive

• Long-term resilience for West Cumbria

• To stop using Ennerdale water by 31 March 2022

Particulars & status

• £300m scope

• 95km pipeline, 80Ml/d treatment works, 3 service reservoirs, 2 pumping stations

• 9yr duration (5yrs construction)

Delivery through innovation

• Extensive stakeholder engagement

• Collaborative planning

• DFMA, 3D/4D modelling and virtual visualisation

ODI potential

• Unique ODI with individual milestones

• 16 milestones in total, 7 achieved, on track to outperform

• Potential ODI reward of £22.5m

Innovating to tackle leakageCumulative ODI reward of £9.1 million in the first 3 years of AMP6

Important to customers and significant focus in PR19

Satellite technology geo-locates an area of leakage and a sniffer dog can then accurately locate the leak

Supplemented by our Event Recognition in Water Network Technology (ERWAN)

- helps predict where issues will occur

- resolve issues proactively

23

ODI reset

24

Lessons learned from AMP6

ODIs have incentivised

company behaviour

Cross sector comparisons require

harmonised performance measurement methodologies

Incentives to be reset with

greater consistency

required

ODIs are not a proxy for

operational efficiency

ODI reset

Illustrative example:

Pollution performance 2016/17

25

(5)

(4)

(3)

(2)

(1)

-

1

2

3

4

5

(120)

(80)

(40)

-

40

80

120

SWT YKY NES SRN TMS ANH SVT WSK UU

OD

I rew

ard

/ (

pen

alty

) £

m

No

rmal

ised

per

form

ance

Pollution performance

Normalised performance based on the Environment Agency’s Environmental Performance Assessment 2016 category 1-3 pollution incidents per 10,000km of sewer (excludes Welsh Water). ODI position taken from company specific Annual Performance Reports 2016/17.

Good performer

Poor performer

Penalty

Reward

Normalised pollution performance

ODI reward (company specific)

ODI penalty (company specific)

ODI reward (normalised)

ODI penalty (normalised)

Proposed common performance commitments

26

Drive for greater commonality in AMP7

Customerperformance

Qualitative SIMHighest ever score; 3rd place for the year overall and 1st in final wave

28

4.00

4.10

4.20

4.30

4.40

4.50

4.60

4.52 4.514.49

(listed)4.48 4.48 4.47

4.46 4.454.44 4.42

4.42(listed)

4.38 4.38 4.33(listed)

4.32

4.26

4.17 4.16

Anglian Wessex Water

UnitedUtilities

Portsmouth Northumbrian WelshWater

Bournemouth DeeValley

SouthStaffs

Yorkshire SouthWest

Bristol SouthEast

SevernTrent

Southern Affinity Thames Sutton & East Surrey

SIM QualitativeAll Company Positioning 2017/18 YTD

Resilience Efficiency

Service

United Utilities is now a leader amongst all companies

Qualitative + Quantitative performance trending

significantly above industry average

Best listedperformer

Leading listed water company for CCWater customer

satisfaction research

Best listedperformer

Leading the sector on service

29

The most improved Utility company

Step change in ranking and performance

+ 7.4 point increase in 12 months

Mostimproved

Resilience Efficiency

Service

Bad debt and cash collection

Household bad debt as a percentage of regulated revenue

30

2014/15

3.7%

2017/18

2.3%

Reducing cost

Award winningbilling and collections initiativessuch as Town Action Planning

The highest DD penetration across the industry at 69.8% despite our affordability challenges

Using segmentation and external data to drive efficient

service and cash collection

External recognition

Excellence in Treating Customer Vulnerability– Collections & Debt ManagementCredit Awards WINNER May 2017

Water Team of the YearU&T Awards WINNER October 2017 Best Vulnerable Customer Support Team U&T Awards Finalist October 2017

Innovative approaches to customer engagement and satisfactionMarket Research Society Awards Shortlisted September 2017

Responsible approach to Consumers Project of the Year 2018 CICM British Credit Awards Finalist February 2018

Financialperformance

Reported income statement

£mYear ended 31 March

2018 2017

Revenue 1,735.8 1,704.0

Operating expenses (722.6) (733.6)

EBITDA 1,013.2 970.4

Depreciation and amortisation (376.8) (364.9)

Operating profit 636.4 605.5

Investment income and finance expense (206.6) (189.0)

Profit on disposal of non-household retail business - 22.1

Share of profits of joint ventures 2.3 3.8

Profit before tax 432.1 442.4

Tax (77.5) (8.5)

Profit after tax 354.6 433.9

Earnings per share (pence) 52.0 63.6

Total dividend per ordinary share (pence) 39.73 38.87

32

Underlying income statement

£mYear ended 31 March

2018 2017

Revenue 1,735.8 1,704.0

Operating expenses (566.8) (567.9)

Infrastructure renewals expenditure (147.1) (148.3)

EBITDA 1,021.9 987.8

Depreciation and amortisation (376.8) (364.9)

Operating profit 645.1 622.9

Net finance expense (277.2) (237.3)

Share of profits of joint ventures 2.3 3.8

Profit before tax 370.2 389.4

Tax (65.3) (76.0)

Profit after tax 304.9 313.4

Earnings per share (pence) 44.7 46.0

Total dividend per ordinary share (pence) 39.73 38.87

33

Revenue analysis

£mYear ended 31 March

2018 2017

UU Water appointed 1,708 1,671UU Water non-appointed 9 9Non-UU Water 19 24Revenue 1,736 1,704

34

Underlying operating costsMovements

£mYear ended 31 March

2018 2017 Movement

Revenue 1,735.8 1,704.0

Employee costs (147.0) (140.9) (6.1)Hired and contracted services (95.4) (93.4) (1.9)Property rates (90.5) (91.6) 1.1Power (70.4) (68.7) (1.7)Materials (66.7) (62.8) (3.9)Regulatory fees (29.7) (26.8) (2.9)Bad debts (20.8) (29.9) 9.1Third party wholesale charges - (3.0) 3.0Cost of properties disposed (9.8) (8.6) (1.2)Other expenses (36.5) (42.2) 5.7

(566.8) (567.9) 1.1Infrastructure renewals expenditure (IRE) (147.1) (148.3) 1.2Depreciation and amortisation (376.8) (364.9) (11.9)Total underlying operating expenses (1,090.7) (1,081.1) (9.5)

Underlying operating profit 645.1 622.9

Adjustments:Flooding incidents (net of insurance proceeds) (1.7) (1.5)Non-household retail market reform1 (1.0) (5.8)Restructuring costs (6.0) (10.1)Reported operating profit 636.4 605.5

35

1 Relates to market reform restructuring costs incurred in preparing the business for open competition in the non-household retail sector

Finance expense

£mYear ended 31 March

2018 2017

Investment income 12.0 13.7Finance expense (218.6) (202.7)

(206.6) (189.0)Less net fair value (gains)/losses on debt and derivative instruments (47.3) (24.3)Adjustment for interest on swaps and debt under fair value option 23.5 15.4Adjustment for net pension interest income (7.1) (10.2)Adjustment for capitalised borrowing costs (39.7) (29.2)Underlying net finance expense (277.2) (237.3)

Average notional net debt 6,614 6,232

Average underlying interest rate 4.2% 3.8%Effective interest rate on index-linked debt 5.0% 3.7%Effective interest rate on other debt 3.1% 3.9%

36

Finance expense: index-linked debt

£mYear ended 31 March

2018 2017

Cash interest on index-linked debt (47.8) (48.2)RPI adjustment to index-linked debt principal – 3 month lag1 (107.8) (65.6)CPI adjustment to index-linked debt principal – 3 month lag2 (3.7) -RPI adjustment to index-linked debt principal – 8 month lag3 (26.3) (15.1)Finance expense on index-linked debt (185.6) (128.9)

Interest on other debt (including fair value option debt and swaps) (91.6) (108.4)Underlying net finance expense (277.2) (237.3)

37

• Cash interest payment of £48m on c£3.7bn of index-linked debt

• Increase in indexation charge mainly due to higher RPI on 3 month lagged debt

• RPI impact on RCV exceeds RPI impact on debt principal

3 Affected by movements in RPI between July 2016 and July 2017

2 Affected by movements in CPI between January 2017 and January 2018

1 Affected by movements in RPI between January 2017 and January 2018

Profit before tax reconciliation

£mYear ended 31 March

2018 2017

Operating profit 636.4 605.5Investment income and finance expense (206.6) (189.0)Profit on disposal of non-household retail business - 22.1Share of profits of joint ventures 2.3 3.8Reported profit before tax 432.1 442.4Adjustments:Flooding incidents in Dec 15 (net of insurance proceeds recognised) 1.7 1.5Non-household retail market reform1 1.0 5.8Restructuring costs 6.0 10.1Profit on disposal of non-household retail business - (22.1)Net fair value losses/(gains) on debt and derivative instruments (47.3) (24.3)Interest on swaps and debt under fair value option 23.5 15.4Net pension interest income (7.1) (10.2)Capitalised borrowing costs (39.7) (29.1)Underlying profit before tax 370.2 389.3

38

1 Relates to market reform restructuring costs incurred preparing the business for open competition in the non-household retail market

Profit after tax reconciliation

£mYear ended 31 March

2018 2017

Reported profit after tax 356.4 433.9Adjustments:Flooding incidents in Dec 15 (net of insurance proceeds recognised) 1.7 1.5Non-household retail market reform1 1.0 5.8Restructuring costs 6.0 10.1Profit on disposal of non-household retail business - (22.1)Net fair value (gains)/losses on debt and derivative instruments (47.3) (24.3)Interest on swaps and debt under fair value option 23.5 15.4Net pension interest income (7.1) (10.2)Capitalised borrowing costs (39.7) (29.2)Deferred tax credit – change in tax rate - (58.2)Agreement of prior years’ tax matters - (15.5)Tax in respect of adjustments to underlying profit before tax 11.8 6.2Underlying profit after tax 304.9 313.4

Basic earnings per share (pence) 52.0 63.6Underlying earnings per share (pence) 44.7 45.9

39

1 Relates to market reform restructuring costs incurred preparing the business for open competition in the non-household retail market

Financial position

£mAt 31 March

2018 2017

Property, plant and equipment 10,790.5 10,405.5Retirement benefit surplus 344.2 247.5Other non-current assets 421.1 384.2Cash 510.0 247.8Other current assets 302.2 333.4Total derivative assets 635.5 807.7Total assets 13,003.5 12,426.1

Gross borrowings (7,912.3) (7,384.5)Other non-current liabilities (1,741.5) (1,620.8)Other current liabilities (297.8) (349.5)Total derivative liabilities (101.0) (249.7)Total liabilities (10,052.6) (9,604.5)

TOTAL NET ASSETS 2,950.9 2,821.6

Share capital 499.8 499.8Share premium 2.9 2.9Retained earnings 2,120.3 1,991.2Other reserves 327.9 327.7

SHAREHOLDERS’ EQUITY 2,950.9 2,821.6

NET DEBT1 (6,867.8) (6,578.7)

40

1 Net debt includes cash, borrowings and derivatives (slide 42)

Movement in net debt1

41

1 Net debt includes derivatives which incorporate regulatory swaps

6,578.7 989.8

26.9

267.0

174.2

701.0 26.5

137.8 0.7 6,867.8

5,000

5,500

6,000

6,500

7,000

Net debt at31/03/17

Operatingcash flow

Fair valuemovements

Dividends Interest andtaxation

Net capex Loans to jointventures

Inflation uplifton index-

linked debt

Other Net debt at31/03/18

£m

Derivative analysis

£mAt 31 March

2018 2017

Derivatives hedging debt 585.5 810.0Derivatives hedging interest rates (50.1) (243.0)Derivatives hedging commodity prices (0.9) (9.0)Total derivatives assets and liabilities (slide 40) 534.5 558.0

42

• Derivatives hedging debt; hedge our non index-linked debt into sterling, floating interest rate debt.

Typically these are designated in fair value hedge accounting relationships

• Derivatives hedging interest rates; fix our sterling interest rate exposure on a 10 year rolling average basis.

This is supplemented by fixing substantially all remaining floating exposure across the future regulatory

period around the time of the price control determination

• Derivatives hedging commodity prices; fix a proportion of our future electricity prices in line with our

policy

• Derivatives are included within net debt to eliminate, to a certain extent, the fair value recognised in

borrowings and thereby present a more representative net debt figure

• Further details of our group hedging strategy can be found in the Group financial statements

Cash flow statementCash from operations covers investing activities £m

Year ended 31 March2018 2017

Net cash generated from operating activities 815.6 820.8

Net cash used in investing activities (723.2) (804.6)

Net cash generated from financing activities 184.7 22.0

Net movement in cash 277.1 38.2

43

Financialresilience

Credit rating summary

45

Moody’s Investors Service (Moody’s)

UUW* ratedA3

UU PLC ratedBaa1

A3 threshold: net debt to RCV

ratio ≤65%

A3 threshold: adjusted

interest cover ≥1.7x

UUW* ratedA-

UU PLC ratedBBB

A- threshold: adjusted FFO to

debt ≥11%

* Any notes issued by UUW’s financing subsidiary United Utilities Water Finance PLC (UUWF) are expected to be rated in line with UUW’s credit rating

Standard & Poor’s (S&P)

Pensions

46

Hedging continues to work well

0

500

1000

1500

2000

2500

3000

3500

4000

4500

Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18

£m

IFRS pensions surplus

Assets Liabilities

£79msurplus

£126msurplus

£275msurplus

£215msurplus

£248msurplus

£220msurplus

£344msurplus

Lower risk investment strategy

• Pension assets <25% equities or other high risk assets

• Underlying interest rates largely hedged through external market swaps and gilts

• Around 50% of liabilities hedged for inflation through external market swaps and index-linked gilts

Significantly less volatility in UU pension scheme funding levels

UU IFRS pension surplus normalised for different assumptionsUU’s Mar-17 IFRS pension surplus increases by c£350m if normalised1

for Severn Trent’s or Pennon’s assumptions

47

Source: Companies’ annual report and accounts

1 Adjusting for inflation, discount rate and mortality assumptions

0

100

200

300

400

500

600

700

Mar-15 Mar-16 Mar-17 Mar-18

£m

UU IFRS pensions surplus (normalised)

UU - IFRS position UU - normalised to SVT assumptions

UU - normalised to PNN assumptions

Regulatory Capital Value (RCV)

48

Inflation and net additions driving RCV growth

United Utilities Water’s regulatory capital value (based on shadow RCV for AMP6, adjusted for actual spend) and presented in outturn prices. Shadow RCV at 31 March 2018 = £11,214m.

7000

7500

8000

8500

9000

9500

10000

10500

11000

11500

Mar

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Mar

-14

Sep

-14

Mar

-15

Sep

-15

Mar

-16

Sep

-16

Mar

-17

Sep

-17

Mar

-18

£m

Regulatory Capital Value (RCV)

RCV gearing

49

RCV gearing supports robust capital structure

RCV gearing1

within our target range, supporting a solid A3 credit

rating

1 RCV gearing calculated as group net debt / United Utilities Water’s regulatory capital value (based on shadow RCV for AMP6, adjusted for actual spend and presented in outturn prices. Shadow RCV at 31 March 2018 = £11,214.)

45%

50%

55%

60%

65%

70%

75%

Mar

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Mar

-14

Sep

-14

Mar

-15

Sep

-15

Mar

-16

Sep

-16

Mar

-17

Sep

-17

Mar

-18

RCV gearing

Financingand hedging

Financing as at 31 March 2018

51

Headroom out to 2020

Nominal

£1,015m raised previously

First public bond issue since 2009• £300m raised with 7-year maturity• Well received by the market

£118m of private placements• €26m with 15-year maturity• €30m with 15-year maturity• HKD739m with 8-year maturity

Index-linked

Total of £165m CPI-linked debt raised previously

Total of £711m RPI-linked debt raised previously

c£2.2bn of c£2.5bn AMP6

financing already raised

Impact of RPI inflationShort-term timing differences – 2018/19

52

Regulated revenue

Dividend policy

Price limits for the 2018/19 financial year are based on the movement in RPI1 inflation between November 2016 and November 2017 (i.e. 3.9%)

Regulatory capital

value (RCV)

Dividends for the 2018/19 financial year are also based on the movement in RPI1 inflation between November 2016 and November 2017 (i.e. 3.9%) to mirror the inflationary uplift in price limits

Opening RCV is inflated by the movement in RPI1

inflation between March 2018 and March 2019

Plus RCV additions (from totex) during the year, gives 31 March 2019 RCV (used for year-end gearing calculation)

Index linked debt2

Debt on 3 month lag – adjustment to principal for 2018/19 is based on the movement in RPI1 inflation between January 2018 and January 2019

Debt on 8 month lag – adjustment to principal for 2018/19 is based on the movement in RPI1 inflation between July 2017 and July 2018

1 Retail Prices Index (RPI)2 Indexation of principal is calculated based on monthly movements in RPI

Cost of debt

53

Index-linked

c£3.7bn index-linked

Average cost of 1.3% real

Nominal

c£3.1bn nominal debt

Fixed for 2015-20 at an average rate of 3.2% nominal

Significant financing outperformance

HedgingPolicies updated in preparation for AMP7

Thorough policies review in response to two key drivers:

1. PR19 regulatory model changes

2. Pensions move to self-sufficiency

54

Inflation hedging

• Around 50% of net debt to be maintained in index-linked form

Interest rate hedging

• Maintain a fixed rate, 10-year, reducing balance on nominal debt

• No ‘top up’ hedge at the start of each AMP

Risk reduction – interest rate hedging policy AMP6

55

Aims to minimise regulatory risk10-yr rolling interest rate profileLock in rolling 10-year average interest rate on nominal debt

Post additional AMP6 hedgingSubstantively fixed rates for whole of AMP6 then revert to reducing balance fixing on nominal debt

• AMP6 cost of debt set through PR14 process

• UU keeps index-linked debt un-swapped as a good match for the RCV which is also RPI-linked to 2020

• During FY14/15 UU substantively fixed underlying rates on nominal floating rate debt for AMP6, whilst continuing with 10-year reducing balance policy post 2020

• During AMP6 UU has then continued to fix in line with its 10-year reducing balance policy

• Manages uncertainty regarding Ofwat’s approach to setting the cost of debt at future price reviews

Risk reduction – revised interest rate hedging policy AMP7

56

Aims to minimise regulatory risk• Ofwat PR19 methodology changes:

• 50% of AMP7 opening RCV linked to RPI and 50% linked to CPIH with post-2020 new additions linked to CPIH

• Cost of debt allowance will be fixed for the embedded portion (70%) with indexation applied for the new debt portion (30%)

• UU hedging policies review:• UU aims to maintain around half of its net debt in

index-linked form• Will look to issue in CPI/CPIH-linked form and/or

swap existing RPI-linked where efficient to do so• UU keeps index-linked debt un-swapped as a

partial inflation hedge for the RCV• 10-year reducing balance policy on nominal debt

continues, but we will not substantively fix at the start of AMP7 to better align with the debt indexation mechanism

Start of AMP7 illustrative hedging profile c70% of nominal debt is fixed at the start of AMP7

70%

Financing and liquidity at 31 March 2018

57

£780.1m, Yankee bonds (USD)

£636.1m, Euro bonds (EUR)

£1,544.2m, GBP bonds

£1,990.6m, GBP RPI linked bonds

£168.0m, GBP CPI linked bonds

£1,571.2m, EIB and other RPI linked loans

£637.5m, Other EIB loans

£584.6m, Other borrowings

Gross debt = £7,912.3mHeadroom / prefunding = £435.2m

£m

Cash and short-term deposits 510.0

Medium-term committed bank facilities1 650.0

Short-term debt (174.3)

Term debt maturing within one year (550.5)

Total headroom / prefunding 435.2

1 Includes £50m of facilities with a forward start in June 2018 and excludes £100m facilities maturing within one year

Debt structure at 31 March 2018

58

United Utilities PLCBaa1 stable; BBB stable

United Utilities Water LimitedA3 stable; A- stable

Ring-fenced and regulated by Ofwat

Yankees:• $250m in 18s• $350m in 19s• $400m in 28s

•£150m in 18s • €500m in 20s• £375m in 22s• £300m in 27s• £50m in 32s1

• £200m in 35s

Other debt:• EIB index-linked loans £1,059m1

• Other index-linked loans £300m1

• Other EIB loans £638m• Short-term loans £45m• ¥10bn dual currency loan• Other sterling loans £128m

•£20m in 43s1

• £50m in 46s1

• £50m in 49s1

• £510m in 56s1

• £150m in 57s1

• £100m in 35s1

• £35m in 37s1

• £70m in 39s1

• £100m in 40s1

• £50m in 41s1

• £100m in 42s1

Euro MTNs:

United Utilities Group PLC

United Utilities Water Finance PLC3

Guaranteed by United Utilities Water Ltd

Euro MTNs:• £25m in 25s1

• £300m in 25s• HK$739m in 26s• HK$830m in 27s• €52m in 27s• £20m in 28s1

• £35m in 30s1

• €30m in 30s• €30m in 31s• HK$600m in 31s• £38m in 31s1

• £20m in 31s2

• €26m in 32s • €28m in 32s

• €30m in 33s• £27m in 36s1

• £29m in 36s1

• £20m in 36s2

• £60m in 37s2

• £32m in 48s2

• £33m in 57s2

Other debt:• Short-term loans £117m

1 RPI linked finance2 CPI linked finance3 United Utilities Water Finance PLC (UUWF) is a financing subsidiary of United Utilities Water Limited (UUW) established to issue new listed debt on behalf of UUW. Notes issued by UUWF are unconditionally and irrevocably guaranteed by UUW and are rated in line with UUW’s credit ratings.

Term debt maturity profile as at 31 March 20181

59

1 Future repayments of index-linked debt include inflation based on an average annual RPI rate of 3% and an average annual CPI rate of 2%

Average term to maturity of just under 20 years

European Investment Bank funding maturity profile

60

Notes

Future repayments of EIB RPI linked debt include inflation based on an average annual RPI rate of 3%.

Dark blue areas represent EIB loans currently drawn and outstanding.

Light blue areas represent a further £250m AMP6 loan assuming this will be signed and drawn in 2018 (being the second tranche of a £500m AMP6 funding package approved by EIB in 2016). It is assumed that this loan will be drawn down in floating rate tranches on an amortising repayment basis with an average loan life of approximately 10-years.

Economic regulation -PR14

Ofwat’s legal duties

62

• Ensure companies properly carry out their functions

• Ensure companies can finance their functions

• Protect interests of consumers, wherever appropriate by promoting effective competition

• Secure the long-term resilience of water and sewerage systems1

Primary Secondary

• Promoting economy and efficiency

• Contributing to the achievement of sustainable development

• Ensure Ofwat gives no undue preference1

1 added as part of the Water Act 2014

Regulatory capital value

63

Market capitalisation(shortly after flotation)

Pre 2015: Capital investment2015-20: RCV additions (from totex)

Regulatory capital value (RCV)

+

Plus other adjustments at each price control

-

Pre 2015: Capital charges2015-20: RCV run-off

+/-

Inflation adjustment

=

Ofwat’s final determination – December 2014

64

Weighted average cost of capital 2015-20

Debt

Real pre tax 2.59%1

Equity

Real post tax 5.65%

WACCAppointee business (vanilla, real) 3.74%

2,3

Includes retail margin allowance of 0.14%

Wholesale business (vanilla, real) 3.60%2

Notional gearing 62.5%

1 Assumes ratio of 75% embedded debt / 25% new debt. Cost of embedded debt = 2.75% & cost of new debt = 2.1%. 2 Quoted ratios for non-enhanced companies. Enhanced companies received a slightly higher appointee WACC of 3.85%/ wholesale WACC of 3.70%3 2010-15 WACC (vanilla, real) of 5.1%; derived from pre-tax debt of 3.6%, post-tax equity of 7.1% and a notional gearing of 57.5%

Ofwat’s final determination – December 2014

65

Allowed revenues

£m 2015-16 2016-17 2017-18 2018-19 2019-20 AMP6 total

Wholesale water (2012/13 prices) 654 660 666 672 679 3,331

Wholesale wastewater (2012/13 prices) 775 783 792 800 804 3,954

Wholesale revenue (2012/13 prices) 1,429 1,443 1,458 1,472 1,483 7,285

Retail household (nominal prices) 132 128 121 116 119 616

Retail Non-household (nominal prices) 36 37 37 38 38 186

Retail revenue (nominal prices) 168 165 158 154 157 802

Total revenue (variable price base)* 1,597 1,608 1,616 1,626 1,640 8,087

* Not consistent with statutory accounting / IFRS revenues

Ofwat’s final determination – December 2014Adjustments for 2010-15 performance

66

Revenue adjustments

largely accepted: £132m allowed

relating to 2010-15 period

Good serviceability

performance: did not receive a

penalty

Derives mainly from revenue correction mechanism and opex incentive allowance

Significant improvements in SIM moved UU into no penalty

zone

All four asset classes rated at least ‘stable’ for 2013/14

Notable achievement given AMP5 starting position as an outlier

67

Wholesale totex FD threshold of £5,328m1

(2012/13 prices)

Wholesale totex in revenue calculation of £5,296m2

(2012/13 prices)

Wholesale ‘pay as you go’ ratios:water = 66%, wastewater = 50%

Allowed wholesale revenue of £7,285m (2012/13 prices)

Nominal growth in the RCV of c£1.5bn (c15%) across AMP6 2015-20

Ofwat’s final determination – December 2014Wholesale price controls

£188m below UU October proposal of £5,516m

but

£427m higher than DD, reflecting additional totex exclusions accepted

Split:£2,356m water and £2,940m wastewater

‘Pay as you go’ ratio flexed in line with allowed totex

Split: £3,331m water and £3,954m wastewater

Comprising c£0.2bn real growth and c£1.3bn RPI uplift (assuming 2.5% p.a. RPI)

1 Includes pension deficit repair allowances2 Combines Ofwat’s estimates of efficient costs with the companies’ forecasts in the ratio 75:25. Excludes pension deficit repair allowances

Ofwat’s final determination – December 2014Retail price controls

68

Allowed retail household revenue of

£616m (nominal

prices)

£20m p.a. special factor claim1 relating

to income deprivation

allowed

No inflationary increases

allowed on retail price

controls

Allowed retail non-household

revenue of £186m

(nominal prices)

1 Reflects impact of the extreme levels of deprivation in the North West on our costs, and includes bad debt and associated costs

Ofwat’s final determination – December 2014Average household bills

69

*Assumes 3% p.a. RPI inflation from 2017/18 to 2019/20

350

375

400

425

450

475

500

2014/15 2015/16 2016/17 2017/18 2018/19 2019/20

£/h

ou

seh

old

Average household customer bill - combined (£)

RPI*

Average bill

Economic regulation -Water 2020 and PR19

Water 2020Adjustments for 2010-15 performance

71

Sludgedisposal

Water resourcesSludge treatment,

transport and disposalWater network plus Wastewater network plus

Market reform – Water 2020

Achieve full allowance across all four price controls

Direct procurement for enhancement projects >£100m

Sludgetreatment

Sewagetreatment

Sewercollection

Treated waterdistributionWater

treatmentRaw waterdistribution

Water resources

Ofwat’s final methodology for PR19 – 13 Dec 2017

72

• Indicative WACC of 2.4%1

• Industry average WACC based on notional company with 60% gearing

• Debt indexation to apply for new debt now assumed to be 30% of total debt

• CPIH to be adopted for the indexation of future price controls

Cost of debt Cost of equity

1.33% 4.01%

Gearing

60%

Appointee WACC

2.40%

Retail margin adjustment 0.10%

Wholesale WACC 2.30%

Calculation of vanilla, real RPI WACC

1 Appointee business (vanilla, real RPI)

Ofwat’s final methodology for PR19 - 13 Dec 2017Summary

73

We are advanced in our plans for PR19 informed by extensive customer engagement and aligned to Ofwat’s key themes

Greater emphasis on earning outperformance payments through innovative performance for the benefit of customers

Reset of the ODI framework driving for increased comparability and rewarding truly significant performance improvement

New econometric models to better reflect genuine cost drivers for wholesale and retail price controls

Indicative WACC of 2.4%; companies can still out / underperform depending upon the effectiveness of their treasury management

PR19 will present both challenges and opportunities – our business performance and exploitation of innovation provides a platform to harness the benefits available

Well positioned for PR19

74

Leading performer in AMP6

Leading on• Customer satisfaction• Environmental performance• Operational performance• Corporate governance

Outperforming against the

regulatory contract and sharing with customers

PR19 business plan on track

Active contribution to

development of PR19 methodology

Extensive engagement and co-creation with customers and other stakeholders

Addressing affordability and

vulnerability

Confident heading into AMP7 and beyond

Opportunity to earn

reward for stretching performance

Systems Thinking setting new benchmarks

PR19 timetable

75

May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan

2019 20202018

Companies submit business plans

3 Sep 2018

Ofwat initial assessment of business plansLate Jan 2019

Exceptional / Fast track draft determination

Mar/Apr 2019

Slow track draft determinationJuly 2019

Final determinationDec 2019

Cautionary statement

This presentation contains certain forward-looking statements with respect to the operations, performance and financial condition of the United Utilities group. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this presentation and the company undertakes no obligation to update these forward-looking statements. Nothing in this presentation should be construed as a profit forecast.

Certain regulatory performance data contained in this presentation is subject to regulatory audit.