UU kicks off results season with outperformance expectations

United Utilities kicked off the UK water results season by announcing that it aims to achieve at least 100 basis points of regulatory outperformance for AMP8, through a mix of financing, Outcome Delivery Incentives (ODI), totex and Price Control Deliverables. The company would not though be drawn on the exact mix or indeed if its targets would change as a result of the Competition and Market Authority’s deliberations on the allowed returns for the five companies that have appealed their price determinations.

United Utilities confirmed that it was fully equity funded for the next five years and had already pre-funded its activities to 2027 through £1.8bn of debt issuance. Management was asked about a potential deterioration in bad debts which came in at 1.5% of revenues to March 2025. Chief executive Louise Beardmore was confident that the additional affordability support put in place, costing £525m, and the continued reduction in its cost to serve customers over the last two AMPs, would mitigate significant deterioration. The company will hold a capital markets day on 19 June at which it will provide more detail of its progress towards meeting the challenges of AMP8.

United Utilities was also asked about the current dry weather. It confirmed that its dependence on reservoirs for water supply puts it in a more favourable position than some of its peers.

In terms of financial results, the company reported an increase in underlying operating profit for 2024-2025 of 22% to £634m, supporting a dividend increase, in line with its policy, of 51.85p, up 4%. Gearing remains stable at 60% debt/RCV despite a 47% increase in annual investment to £1,083m. The return on regulatory equity for AMP7 has been restated down by 60 basis points to 6.1%, reflecting a change in Ofwat’s methodology published on 31 March 2025 that will affect stated returns across the sector.

Outperformance over AMP7 against the base allowed return of 4% was driven primarily by financing efficiency at 2.8% and tax outperformance of 2%, compared to totex overspend by 2.2% which reflected unfunded spend but also inflationary pressure - some of which will be mitigated by new regulatory cost protection mechanisms introduced for AMP8.

A £9bn capital investment spend over 2026-2030 will also give more scope to achieve savings, according to management. In terms of operational progress over AMP7, management was keen to report a 39% reduction in average sewer spills; a 36% reduction in sewer collapses; an 18% reduction in sewer blockages; a 19% reduction in internal sewer flooding; and a 29% reduction in water quality contacts.

In terms of current year guidance. United Utilities will incur an ODI penalty compared to a reward of £24m for the year to March 2025, reflecting the new heightened AMP8 performance commitment standards. Management was able to confirm an annual dividend per share of 51.85p, increasing in line with its inflation-linked policy, based on CPIH for November 2024 of 3.5%.

Management’s confidence in regulatory outperformance drove shares up 1% on results day.