United Utilities is reporting a drop in profits, fall in turnover and an increased shareholder dividend turnover in its half year results for the six months ended 30 September 2022 published this morning.

Commenting on operational performance, United Utilities said it continued to improve operational performance in the first half of this year and that sustainable performance improvements are earning outcome delivery incentive (ODI) rewards.

The company is reporting significant reductions in spills from storm overflows - a 29 per cent reduction in reported spills last year (from a 2020 baseline) with further improvement expected this year.

The utility is continuing to perform well on Ofwat's measure of customer satisfaction, C-MeX – its combined score for the first half of the year places it in the top half for the industry, the highest of the listed companies, and fourth out of all water and wastewater companies.

On leakage, United Utilities said it has reduced leakage by 7 per cent to date in AMP7, putting it on track to deliver its target of reducing leakage by 15 per cent by 2025 – the utility has met its leakage target for 16 consecutive years. This has been delivered using the latest innovations and detection techniques, the company said, including the use of Pressure Management Valves, installation of over 72,000 sensors across its pipe network, and rapid machine-learning technology that can pinpoint the exact location and size of a leak with a greater than 85 per cent success rate based on the unique sound it makes.

However, as a result of particularly dry weather this summer, the company experienced three atypically large pipe bursts, resulting in an £8 million increase in operating costs in the first half of the year, including a £1 million provision for net amounts it may be liable to pay in future periods.

River health an ongoing priority

Describing river health as an ongoing priority, United Utilities said its 'Better Rivers, Better North West' programme detailed pledges and targets for “kick-starting a river revival” across the region, supported by a £230 million base investment across AMP7 which will lead to 184 kilometres of improved waterways. In addition, part of the reinvestment of outperformance announced in May is being used to accelerate these plans and get a headstart on future requirements, the water company added.

The results go into some detail commenting on spills from storm overflows, explaining that the North West receives 28 per cent more average annual rainfall than other regions and that the industrial legacy of the region means it has a much higher proportion of combined sewers, with 55 per cent of the network taking both waste and surface water compared with the industry average of 27 per cent.

AMP8 environmental programme - early indications point to investment that could be significantly higher than average level over AMP6 and AMP7

United Utilities is highlighting the need for substantial investment following keen interest from the public and Government, and publication of the new Environment Act 2021, and the fact that ambitious targets have been set for a progressive but substantial reduction in spill frequency across the country.

The company comments:

“As a result of these new national requirements and the regional imbalance in the level of rainfall that enters sewers, new targets to reduce spill frequency indicate a substantial investment need over the longer term, with DEFRA comissioned esti mates suggesti ng that over 60 per cent of the sector investment necessary to meet their targets needing to be made in the North of the country.

“We are still early in the process of scoping and costing our environmental programme for AMP8, but as a result of these targets and other drivers coming out of the Environment Act, early indications point to an investment that could be significantly higher than the average level over the last two AMP periods.“

“Given the size of this potential investment, we are in discussions with regulators about balancing the pace of investment in light of affordability and deliverability considerations, and the investment needed to meet these new environmental requirements is likely to run over successive AMP periods.”

Reporting on progress, United Utilities said it was an early adopter of spill monitoring and had one of the largest installed bases in the sector, with 100 per cent coverage to be achieved by 2023. United Utilities has made a £100 million investment in Dynamic Network Management (DNM), a state-of-the-art digital solution that uses a network of sensors and artificial intelligence that provides a real-time picture of its sewers, allowing prediction and proactive detection of deviations from expected levels of performance in the wastewater network.

The company, which has set a target of at least a 33 per cent reduction in spills by 2025, from a 2020 baseline, said it has already made great headway, delivering a 29 per cent reduction last year, and that progress so far this year suggested that it will exceed the target.

However, United Utilities said it recognised that “there is more we could do, both individually and as a sector” adding:

“The Government has asked us to go faster, and we have responded by identifying additional investment that could be spent in AMP7 but would be fully recovered in AMP8.”

Delivering on AMP7 and preparing for AMP8

Commenting on its AMP7 programme, United Utilities said it was “not immune to widespread macro challenges resulting from high levels of inflation, but it was “relatively well placed.” The utility is one of the top performing companies on customer ODI rewards and is on track for its largest annual reward of £30 million this year, and continuing to target a net reward of £200 million for AMP7.

According to the results, the company has 98 per cent of its base capital programme for AMP7 on contract, with 65 per cent already delivered at the halfway point in the five-year period.

With regard to its power requirements, United Utilities has commodity prices locked-in on 96 percent of its forecast consumption for this financial year at an average price of £85/MWh, compared to the market cap of £211/MWh.

Looking ahead to AMP8, united Utilities said it is building an ambitious plan for the 2025-30 period, AMP8, saying it was confident that a “strong and resilient corporate and financial structure”, supported by its Systems Thinking approach and a culture that seeks “to continually improve, innovate and invest for sustainable long term performance”, saw it “well placed to continue to deliver for all our stakeholders in this regulatory period and beyond.”

Financial performance – revenue down, increased costs and fall in operating profit

Commenting on its financial performance, United Utilies said that the current “difficult macro-environment” had impacted financial performance in the first half of the year. Revenue for the six months to 30 September 2022 decreased by 1 per cent, down £13 million, at £919 million, driven mainly by lower consumpti on than predicted.

Operating profit has also fallen - down £74 million to £259 million, driven by the decrease in revenue and a combination of inflationary increases on input costs, increased investment in infrastructure renewals expenditure (IRE) and the impact of incidents resulting from dry weather over the summer.

“As expected, inflationary pressures have impacted input costs resulting in a £36 million increase. The largest increases have been to power and chemical costs while we have experienced smaller inflationary increases to labour and other contract costs”, the company said.

The group's net capital expenditure was £331 million, principally in the regulated water and wastewater investment programmes. This excludes infrastructure renewals expenditure, which is treated as an operating cost.

Underlying loss before tax was £8 million, £205 million lower than the underlying profit before tax in the first half of last year. This reflects the £74 million decrease in underlying operating profit and an increase in underlying net finance expense of £132 million.

Reported profit before tax increased by £214 million to £426 million reflecting a £255 million decrease in reported net finance expense (including fair value movements), from a £119 million net finance expense in the first half of last year to a £136 million net finance income, £2 million reduction in share of losses of joint ventures and a £31 million profit on disposal of its subsidiary United Utilities Renewable Energy Limited, partly off set by the £74 million decrease in reported operating profit.

Interim dividend per share to increase by 4.6 per cent

The Board has proposed an interim dividend of 15.17 pence per ordinary share in respect of the six months ended 30 September 2022, an increase of 4.6 per cent compared with the interim dividend of 14.50 pence for last year, in line with the group's dividend policy of targeting a growth rate of CPIH inflation each year through to 2025.

Commenting on the results, Chief Executive Officer Steve Mogford said the company was continuing to focus on the areas that matter most to its stakeholders, “delivering sustainable operational improvements for customers and the environment, demonstrating financial resilience and improving regulatory performance, all while providing sector-leading affordability support.”