United Utilities (UU) announced its half year results on 14 November, delivering progress on key performance metrics including a 26% reduction in drinking water complaints, fewer sewer blockages and collapses, and industry-leading pollution reductions.
Underlying operating profit increased by 24% to £336m, allowing the board to recommend an interim dividend in line with its policy of 17.28p +4% and to confirm a full year dividend of 51.87p in its guidance.
Returns, regulatory capital value (RCV) growth and balance sheet strength remained on track with management expectations for the current five-year period. Adjusted group RCV gearing was 60%, with liquidity extended to 2027 from recent debt issuance.
UU expected to earn an Outcome Delivery Incentive (ODI) reward of £34m, while many of its peers expect penalties. The company has committed to accelerate its reduction of sewer spills, bringing forward work to reduce discharges from an additional 700 overflows. This now represents £500m of accelerated expenditure.
Questions from investors as the H1 results were announced were focused on Ofwat’s regulatory review. Management assured analysts that Ofwat had been taking representations on the Draft Determinations seriously. UU said it had had “constructive" discussions on allowed returns and the reward and penalty regime, and had provided additional detail on its environmental enhancement needs and how these could be delivered.
Analysts were particularly interested to explore how the ODI adjustment package proposed by Ofwat, intended to reduce the risk of systemic underperformance by the sector, might work. Management said that an annual adjustment, rather than an end of period true-up, was needed to provide clarity to all stakeholders.
UU management was confident that Ofwat would reflect the representations it had received from the water industry, rating actions by the credit agencies and the cost of recent debt issuance in its final determinations in December. Management believed Ofwat remains mindful of its statutory duty to allow efficient companies to finance their functions.
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