On 28 July 2008, a new statutory holding company structure became effective by way of a share exchange between the shareholders of United Utilities PLC and United Utilities Group PLC and the listed parent company became United Utilities Group PLC (UUG) (see note 24). At that time all existing share option schemes and previous awards made by the United Utilities PLC schemes were transferred to the new listed parent company. From this point, all awards made by the group’s schemes are in UUG shares.
The company operates several share option schemes. Options are exercisable at a price equal to the average quoted market price of the company’s shares on the date of grant. Options are forfeited if the employee leaves the group through resignation or dismissal before the options vest.
Cash-settled and equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the date of grant of equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based upon the group’s estimate of shares that will eventually vest.
Fair value is measured by use of both simulation and binomial models according to the relevant measures of performance. The models include adjustments, based upon management’s best estimate, for the effects of exercise restrictions, behavioural considerations and expected dividend payments. The option life is derived from the models based upon these assumptions and other assumptions identified below.
The total expense included within operating profit from continuing operations in respect of equity-settled share-based payments was £2.4 million (2009: £1.9 million) and £nil (2009: £nil) in respect of cash-settled share-based payments, plus £0.3 million accrual of national insurance contributions (2009: £0.2 million).
The United Utilities Employee Share Trust was established by a trust deed executed on 21 August 1996. The Trustees hold the trust fund for the benefit of the beneficiaries (being employees or former employees of the group’s companies and their relatives) to the extent determined by the rules of the share schemes. As at 31 March 2010, the Trust held 41,418 (2009: 41,418) 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 current and prior years were waived.
Further details of the different types of share-based payments are as follows:
Continuing operations
Company share option scheme 1999
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).
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 10 years from the date of grant.
Employee ShareSave scheme
The employee ShareSave scheme was available to all eligible employees and was based on Save As You Earn (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. The latest grant under the ShareSave scheme was made in the year ended 31 March 2004. No further grants have been made under this scheme.
Performance share plan
The performance share plan (PSP) is for senior executives of the group. Options under the PSP are exercisable no earlier than three years from the 31 March preceding the date of grant and have an exercise period of three months. PSP awards granted prior to 31 March 2008 are subject to a total shareholder return (TSR) performance condition (a market-based measure of performance). PSP awards granted during the year ended 31 March 2009 onwards are 50 per cent subject to a TSR performance condition (a market-based measure of performance); the remaining 50 per cent of the awards are subject to operational performance conditions.
Matching share award plan
The matching share award plan (MSAP) is for senior executives of the group. Options under this scheme are exercisable no earlier than three years from the 31 March preceding the date of grant and have an exercise period of three months. MSAP awards are 50 per cent subject to a TSR performance condition (a market-based measure of performance); the remaining 50 per cent of the award is subject to operational performance conditions.
Deferred share plan
The deferred share plan (DSP) is for the employees at the level below senior executive. An annual award in deferred group shares is made on the basis of a maximum of 30 per cent of salary, apportioned according to the extent of the employee’s achievement of the annual cash incentive plan maximum for the financial year. A limited number of employees at the next level below senior executive may also be nominated to receive a one-off award of a fixed number of deferred group shares in recognition of exceptional performance during the year. Shares are released after a three-year holding period and are conditional on continued employment with the group during this time. These options may, at the group’s discretion, be settled in cash. DSP awards grant employees free shares with no performance conditions which are entitled to dividend equivalents, therefore the fair value of the award is equal to the market price of the share at the grant date (2010 weighted average fair value at date of award: £5.41, 2009: £4.90).
Cash-settled share-based payments
The group issued, to certain employees, share appreciation rights (SARs) that require the group to pay the intrinsic value of the SARs to the employee at the date of exercise. At 31 March 2010, the group has recorded liabilities of £nil (2009: £nil) in respect of SARs.
The fair value of the SARs is determined using the Black-Scholes pricing model using the assumptions detailed below. The group recorded a total charge of £nil (2009: £nil) during the year in respect of SARs. At 31 March 2010, the total intrinsic value of the vested SARs was £nil (2009: £nil).
Other share-based payment plan
The main all-employee scheme is the HM Revenue & Customs 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 10 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. The group 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.
The following tables show the inputs to the model used to calculate the fair value of equity-settled share options granted during the years ended 31 March 2010 and 31 March 2009 respectively.
Note:
(1) Awarded in June 2009.
Notes:
(2) Awarded in August 2008.
(3) Awarded in January 2009.
No cash-settled share options were granted during the year (2009: £nil).
The expected volatility is based upon the historical volatility of the company’s share price over the expected life of the option.
The movement in total outstanding options in respect of grants of equity instruments after 7 November 2002 unvested as of 1 April 2004, and therefore within the scope of IFRS 2 ‘Share-based Payments’, is provided below:
The weighted average exercise price of share options in the matching share award plan, performance share plan and deferred share plan was £nil for the year ended 31 March 2010 (2009: £nil).
None of the share options identified above as outstanding at 31 March 2010 had vested at that date.
For the purpose of IFRS 2, expiry of performance share plan awards is measured with reference to the achievement of the performance conditions within the vesting conditions at the reporting date, not the end of the notional vesting period of three years from grant date. Therefore options with performance conditions measured at the end of a reporting period are treated as expired if their performance conditions are not achieved at the reporting date.
Options outstanding at 31 March under the share option schemes which are outside the scope of IFRS 2, together with their exercise prices and dates, were:
Note:
(1) The exercise price equalled the market price at the date the option was granted.
Discontinued operations
Vertex performance share plan (Vertex PSP)
The outstanding number of options at 1 April 2008 was 563,243. The number of options increased for dividend reinvestment by 14,106 and then the total of 577,349 options expired in the year ended 31 March 2009. The closing number of outstanding options at 31 March 2009 was nil.