United Utilities is reporting increased revenues but lower profits – attributed to the new price controls for the AMP6 2015-20 regulatory period with the publication this morning of its full year results for the year ended 31 March 2016.

Revenue was up £10 million at £1,730 million, despite the new regulated price controls – United Utilities said it had benefitted this year from higher than assumed volumes, along with an increase in non-regulated sales, and last year was impacted by the £21 million special discount applied to customer bills.

Underlying operating profit was lower by £60 million, at £604 million, as expected, reflecting the new regulated price controls and an increase in infrastructure renewals expenditure as it accelerates its investment programme to deliver early operational benefit, along with increases in depreciation and other costs, partly offset by a reduction in bad debts, power and regulatory fees.

Total regulatory capital investment in the year, including £169 million of infrastructure renewals expenditure, was £799 million, in line with company’s plans to accelerate the 2015-20 investment programme. In addition to its £3.5 billion five-year regulatory capex programme, it expects to invest over £100 million in non-regulated projects, principally relating to solar power, of which £32 million was invested in 2015/16.

Underlying profit before tax – down by £39 million to £408 million - the £60 million fall in underlying operating profit was partly offset by a £21 million reduction in underlying net finance expense, while underlying profit after tax was down by £29 million to £325 million.

AMP6 partners involved much earlier in project definition and packaging projects

United Utilities said it had made a good start to the 2015-20 investment programme and is accelerating the five-year programme to maintain and improve services for customers and deliver further environmental benefits.

Commenting on the new contracting arrangements in place for AMP6, the results say:

“We re-tendered our engineering and construction partners and selected a single engineering partner and four new design and construction partners. We are involving our partners much earlier in project definition and packaging projects by type, geography and timing to deliver efficiencies. Projects will be allocated to partners on an incentive basis or competed between the partners and, where appropriate, third parties. Our partners have come forward with a range of solutions, innovations and pricing and early results are encouraging.”

On regulatory outperformance, the utility said it has identified and is implementing initiatives to deliver over £400 million of savings to meet its totex allowance.

United Utilities said it had delivered a strong operational and environmental performance during the year - apart from a major incident last August which saw more than 300,000 households in Lancashire who had to boil their water for much of August because of parasite contamination. The water company incurred compensation payments and other associated costs of around £25 million.

However, the water company said the water quality incident had not had a material impact on its Outcome delivery incentives (ODIs) - overall, United Utilities achieved a net reward of £2.5 million. The main areas of reward came through good performance in the areas of private sewers and pollution, with the main penalty being on reliable water service as a consequence of some no-supply events in the year.

While the overall outcome was better than United Utilities’ initial expectations, the ODI targets get tougher as it moves through the five-year regulatory period. 

"Therefore, we need to make further improvements to avoid penalties and this will be very challenging for us. Nonetheless, our progress this year gives us the confidence to improve our target to reflect a cumulative net ODI outcome over the 2015-20 period of between plus £30 million and minus £70 million,” the results say.

£100m+ to be invested in solar power in AMP6

United Utilities’ asset optimisation programme continues to provide the benefits of increased and more effective use of operational site management to optimise power and chemical use and the development of more combined heat and power assets to generate renewable energy. Supplementing the electricity it already generates from sludge, the water company is  developing other renewable energy facilities, principally in the area of solar, where it expects to invest over £100 million across the 2015-20 period of which £32 million was invested in 2015/16.

Renewable energy production in 2015/16 was 138 GWh, representing 17% of its electricity consumption in the year - up from 13% in 2012/13. On carbon, United Utilities said its carbon footprint totalled 454,857 tonnes of carbon dioxide equivalent in 2015/16 - a 22% reduction over the last 10 years.

The utility is already implementing plans to significantly increase self-generation over the next few years, with a target of around 35% of electricity consumption by 2020, “subject to there being sufficient projects with acceptable returns.”

JV with Severn Trent gives “first mover advantage” in business retail market

The results also flag up the fact that the company has been building its capability to ensure it is in a strong position as the competitive business retail market evolves. United Utilities said its  ‘Water Plus’ joint venture with Severn Trent – now approved by the CMA-  reinforces this position and gives it “first mover advantage” ahead of full market opening in 2017.

Describing the firm as “already very active in this expanding market”  before the JV , United Utilities said it had quickly grown to be one of the most successful new entrants in Scotland After attaining a Scottish water supply licence in 2012. The water company has continued its expansion and have now won approximately 300 customers, covering around 3,500 sites, saying:

“We will continue to bid for business at attractive margins and are not solely focusing on growing market share.”

Commenting on the results, Steve Mogford, Chief Executive Officer, said:

"We are encouraged to see further improvement in customer satisfaction, particularly in light of the unprecedented flooding events. We placed customers at the heart of our response and we benefitted from our recently opened integrated control centre and improved network resilience.”

"We accelerated our investment programme to deliver early operational benefit and exceeded our expectations by achieving a small reward across our outcome delivery incentives, against a tough set of targets. In addition, we have now identified and are implementing a range of efficiency initiatives to meet our total expenditure allowance. We plan to invest over £100 million across the 2015-20 period in renewable energy projects.”

"We received CMA approval for our joint venture with Severn Trent to merge our business retail operations, providing us with first mover advantage and economies of scale ahead of full market opening in 2017. The joint venture, named Water Plus, combines the complementary skills of both companies to deliver a fresh, competitive operation providing a very attractive retail proposition for business customers. “ 

"Our progress over this first year of the new regulatory period shows we are well placed to deliver further value for customers, shareholders and the environment, underpinned by a robust capital structure and good credit ratings."