UU raises £800m to support £2.5bn extra growth package

(by Verity Mitchell)

United Utilities (UU) has raised £800m from long-term UK and international investors to help fund £2.5bn of additional proposed investment by 2030 to cater for growth. The company pointed out that government housebuilding targets for the North West have increased by 66,000 homes since the current programme was agreed in 2024, and new demand is also emerging from expanding industries such as data centres and clean energy.

UU has submitted an initial package of £1.4bn of proposed investments to Ofwat, including: 

• £220m for non-potable water supply to the Hynet clean energy cluster in Ellesmere Port.

• £200m for new water infrastructure to support proposed data centres in East Manchester.

• £350m for new wastewater treatment capacity at 34 sites to support 100,000 people, supporting government housebuilding targets and existing communities.

• £410m to increase resilience of existing assets, including upgrading boreholes and refurbishing water storage facilities.

  
  

Ofwat is expected to make a draft decision in August, with a final decision following in December. 

These new plans are in addition to the company’s existing £13.5bn AMP8 investment programme, and would create a further 4,000 jobs in addition to the 30,000 supported by existing plans.

Results:

This news, together with UU’s announcement of preliminary unaudited full-year results to 31 March, precipitated a significant share price hike, up 12% on 30 April.

The results showed increased operational leverage through the profit and loss account culminating in a 45% increase in underlying earnings per share, compared to a 20% increase in underlying revenues. Despite a 41% increase in capital expenditure to £1.45bn, regulatory gearing has remained stable at 60%, reflecting higher cash flow retention. Dividends per share increased by only 3.5% in line with the board’s inflation-linked policy.

There have been significant reductions in both the frequency and duration of sewer spills by 23% and 27% respectively. UU said it has achieved all its targets for the first year of the current five-year period. Given the step up in allowed investment, delivering the outputs will be a challenge for the sector. UU looks well placed, given some of its peers have been slow to mobilise their capital partners.

Generating regulatory rewards so early in the five-year period is a challenge so UU expects to incur a £35m performance penalty, which remains in line with its guidance even though 80% of its performance commitments have been met.

It has increased its target for regulatory returns by 100bp over the five-year period to 10-11%. This will have pleased the market in addition to the growth in profits and stable gearing.

Ofwat assumed in its final determinations that all the water companies in England and Wales would need to raise equity to fund investment and pay dividends, based on its view of a notional capital structure. UU has until today rebutted Ofwat’s assumptions and has delivered stable debt in the results announcement. However, a lowering of the temperature of perceived regulatory risk in England and Wales has led to a number of successful equity injections, most recently for Northumbrian Water.

• Comment: This more positive investment climate has no doubt persuaded the UU board of the merits of accelerating investment, underpinned by new equity with the added attraction of the participation of retail investors. UU has a successful track record of accelerating investment in previous regulatory periods, precipitating higher regulatory asset growth. There may also have been a collective sigh of relief reflected in the market rally now that UU has provided clarity about funding higher growth and supporting medium-term debt metrics.