United Utilities is a FTSE 100 company with a turnover of approximately £2 billion. United Utilities is also the holding company for United Utilities Water (UUW), which provides water and wastewater services in Northwest England. This subsidiary handles approximately 1.9 billion litres of water each day on behalf of around 3.2 million homes and businesses. We spoke to Tom Fallon, Director of Treasury, about his role at United Utilities and an innovative treasury training programme the company ran in conjunction with a leading UK university.

Please could you give me an insight into United Utilities’ activities?

The company was privatised in 1989 and since then UUW has invested to provide significant improvements in its infrastructure which serves Northwest England. You might be surprised to learn that at the time of privatisation, the city of Liverpool had no sewage treatment whatsoever.

The improvements have been achieved through a series of capital investment programmes which we carry out with the agreement of the UK water regulator, Ofwat, every five years. The capital investment programmes ensure that the UK, as an EU member state, complies with its obligations under EU Directives for drinking water quality and for combating climate change.

These enormous capital investment programmes have resulted in UUW’s assets growing by 12% compound annually. The treasury department has therefore had to raise large amounts of debt each year in order to fund that growth.

What is your role and what are your major responsibilities?

I’m director of treasury and it’s my job to make sure we don’t run out of money! This has become rather more challenging in light of recent market developments, particularly as we have to find between £0.5 billion and £1 billion in funding each year to remain solvent. We have issued fairly extensively in the US dollar, euro and sterling bond markets. In recent years, we’ve also issued a huge amount of ultra long-term index linked debt where the principal amount tracks the UK retail price index.

Although those deals were done off our medium-term note programme, they’ve all been placed privately into structured transactions which largely have been monoline wrapped, meaning that an insurer has taken on the credit risk by providing a guarantee for the bond. With the monoline credit insurers being in a difficult situation at the moment, those activities have largely been discontinued and we are focusing more on conventional bond market opportunities.

I also look after our relationships with credit investors, which is a significant area of my work. In addition, I get quite involved in the price reviews with the regulator, which is probably slightly unusual for a corporate treasurer. The reason for my involvement is that the regulators for the UK set utility prices after taking account of investors’ required rates of return and so the regulator has a legal duty to ensure that water companies are able to finance their functions. Since I regularly meet major international credit investors, I am particularly well placed to give insight into the credit market’s willingness to provide the capital that the UK water industry needs for those investments.

How is the treasury organised?

The treasury department comprises a mixture of chartered accountants and chartered bankers and we find that this blend of professionals gives us the opportunity for people to learn from each other. We have approximately 12 people in the function, three of whom work part-time. The function is centralised but there are several teams within the treasury department.

“The treasury department comprises a mixture of chartered accountants and chartered bankers and we find that this blend of professionals gives us the opportunity for people to learn from each other.”

There is a team of two people looking for opportunities for us to raise debt in the public bond market and they also manage our relationships with our bank group, in particular the very important relationship with the European Investment Bank, the funding arm of the European Union. We also have a dealing operations team consisting of four full-time equivalent staff. This team is involved in pricing and selling our euro commercial paper and they invest any cash balances that we have. A large amount of our essential back up liquidity is deposited in foreign currency and this gives rise to a significant requirement for short-term foreign currency hedging, which is also looked after by our dealing operations team. We are however very much a cost centre and we do not engage in speculative dealing.

Special projects, management information and accounting support are handled by a team which is led by our deputy treasurer. We also have a treasury manager who looks after insurance and money transmission. With three million water customers, we have a high volume of payments, including direct debits, cheques and cash collections over the counter through high street agencies. We are increasingly offering our customers more flexible options. For example, some of our customers are paying fortnightly in line with the receipt by them of say, state benefits. It’s all part of a programme to make the water bill more affordable.

In addition, we have a treasury committee that meets quarterly. It is chaired by Paul Heiden, who is also chairman of the audit committee. We get detailed scrutiny as to what we’re doing, which I think is crucial. These days it’s very important to have good oversight of the treasury function.

How important is staff development in the treasury context?

This is another very important area for us. The profile of many of our staff is that they are long on potential, but shorter on experience and therefore looking for development. In many cases, corporate treasury is a first assignment for some of our accountants. So to satisfy their requirements and those of the department, it is important that we have a very good programme for staff development.

I understand that you organised a training programme earlier this year. What shortfalls were you hoping to address?

In the distant past, treasury accounting was largely a matter of accruing income and all one needed to know was the principal amount, the interest rate and the number of days to accrue, but those days are over. Accounting for treasury became far more complicated around eight years ago with the introduction of fair values for debt and derivatives being disclosed in the notes to the accounts. But now, changes in fair value for some instruments go straight to P&L, so valuing future cash flows is more important than ever.

According to our treasury accounting system, the total of United Utilities’ treasury contracted cash flows is more than £30 billion stretched out over some 50 years. Changes in fair value reflecting interest rate or exchange rate movements hit the P&L effectively each day. Under IAS 39 (Financial Instruments: Recognition and Measurement), any derivatives that are designated as hedges need to be tested to demonstrate that they remain effective against the underlying item being hedged. This testing can involve regression analysis and other high-level financial calculations which are not routinely used by treasury staff.

The reason for the course therefore was to recognise that mathematics can be quite daunting and that it is extremely important that staff are 100% confident in what they are doing.

How did you go about setting up the training programme?

In the past we used trainers based in London but we found that these courses would generally be targeted toward banks. We would bring the trainer up to our headquarters in Warrington in order to reduce accommodation costs. One of the biggest unavoidable costs with training however is the working time lost when staff are sent to attend a course. Indeed, with such a small team, our ability to carry out dealing operations can be hampered by sending a large proportion of the department on a course. In the past, we ran weekend courses and gave staff time off in lieu but this wasn’t an overly popular arrangement!

Professor Jeremy Levesley, head of department of mathematics at the University of Leicester, and I were talking generally about the development in university maths courses toward financial mathematics. I explained some of the challenges that I was facing in finding suitable courses for staff and Professor Levesley indicated that he would be keen for his department to get closer to industry and could possibly put together a bespoke course for United Utilities.

I provided Professor Levesley with a comprehensive ‘document of needs’ which outlined the training areas to develop and staff from the department of mathematics at the university designed the programme accordingly. I was very excited about the idea because it had not previously occurred to me that academia could provide a solution to our training requirements.

What was the format and who was involved?

We agreed that the course should be structured as a ‘hands on’ workshop rather than a series of lectures and it so happened that the university had just opened a new hall of residence which meant that accommodation and teaching facilities were all on the same site. The university provided laptops to facilitate the learning.

I was particularly pleased with the timing of the course, which was run the first week back after the Christmas break. This was a quiet time for United Utilities as we have a March year end and the course conveniently coincided with two new hires we had made in treasury. We sent eight people from the treasury team on the course and managed with a skeleton staff. The opportunity to go on the course also attracted interest from the accounting department and tax and four employees signed up, including the senior accountant who leads the head office team, as well as a senior manager from the tax department.

It was an effective result cost-wise with a package price and competitive accommodation. I was very pleased with the team building opportunities that this course offered. We have always had a good relationship with our accounting and tax colleagues but the course offered a good way of people getting to know each other better.

How did you measure the success of the course against your original objectives?

I felt that the main objective of the course was to build confidence with the mathematics. Mostly we use proprietary tools to do the number crunching, including those which are built into Bloomberg terminals and our treasury accounting systems, but staff need to be comfortable with the numbers coming out of these ‘black box’ systems and have an insight into what the calculations actually are.

“Mostly we use proprietary tools to do the number crunching, including those which are built into Bloomberg terminals and our treasury accounting systems, but staff need to be comfortable with the numbers coming out of these ‘black box’ systems and have an insight into what the calculations actually are.”

I interviewed all 12 of the staff who came back from the course to get feedback from them as to whether their objectives had been achieved. In addition, the treasury members of staff had been given a short list of problems to think about during the course. These were intended to be ‘tutorial style’ questions which they discussed with me or our deputy treasurer on their return to see if their understanding had reached the levels we were looking for. I was very pleased with the feedback from the programme and I have found during the course of this year that staff are much more comfortable doing analytical reviews of the numbers coming out of the systems that we operate.

What else do you do to keep the skills and knowledge of your staff up to date?

The department has produced a number of training modules covering topics such as valuing swaps, money transmission, foreign exchange and letters of credit. We also have a case study of how the department disposed of the company shareholding in THUS Plc, which took place in 2007. These modules largely take the form of a PowerPoint presentation or a PC screen recording, in both cases with an accompanying audio, and these are converted to Flash based movies that can then be streamed via the company’s intranet website. These are made available not only to the treasury teams but also to the wider finance community in the company.

What projects are you working on in the next 12 months?

The major focus in the UK water sector at the moment is inevitably on the next five yearly price review. We will be submitting our final business plan to Ofwat in the first quarter of 2009 and that will culminate in the regulator setting our final prices in November next year. Credit investors will also be focused on the price review so there will be many questions for us to answer. We like to pre-empt some of these questions however by communicating openly with the credit market so everyone is aware of what is happening.