United Utilities has today submitted its draft AMP8 £13.7 billion business plan proposals for 2025-30 to water sector regulator Ofwat.

The plan sets out the biggest CSO spill reduction programme across the country with a 60% reduction in spills in the decade to 2030, alongside protecting and enhancing over 500km of rivers and bathing waters.

Other features of the plan include:

• Safeguarding supplies for 3 million households as the company improve waters quality and security of future supplies and halve the chance of needing a hosepipe ban in the future
• Pushing the frontier forward on avoiding pollution incidents with a further 25% improvement between 2025-30
• Delivering a 25% decrease in leakage over the decade to 2030 – the company will invest to build a more resilient water network, replacing over 950 km of pipes and mains and fixing leaks
• Responding to the challenges of climate change and reducing internal flooding of homes and businesses by 32%
• Supporting 30,000 jobs in the North West economy, of which 7,000 are new.

The investment programme will see an average real bill increase of around £22 every year - United Utilities is proposing a comprehensive £525 million package of affordability support, doubling its support for people struggling to pay their bills. The company said the support package would enable it to help more than 1 in 6 customers - meaning it expects no increase in water poverty despite the increase in bills.

Louise Beardmore, CEO said:

“We’ve been listening to customers and communities right across our region to understand what really matters. What’s clear is that we need to improve services for customers and the environment. That’s why we are proposing the largest investment in water and wastewater infrastructure in over 100 years, with £13.7 billion planned between 2025 and 2030 to build a stronger, greener and healthier North West for everyone.

“It’s a hugely ambitious plan, and we've engaged with 95,000 people across our five great counties of Cumbria, Lancashire, Merseyside, Greater Manchester and Cheshire, to make sure we get it right, shaping our plans for each county to address the things that they’ve told us matter most.

“Our plan will secure water supplies for the future, halving the need for hosepipe bans, reduce storm overflow spills into our rivers and seas and upgrade our water network to cut leakage and service interruptions for customers.”

“Today’s announcement is the first step in a long process but our robust balance sheet, low gearing and solid credit ratings mean we are in a very strong position to deliver our plan – and we are already underway after bringing forward £1.2 billion of investment earlier this year. We are now ready to move forward and deliver the step change we all want to see.”

“This business plan is our most ambitious yet. It is a high quality plan, meeting all our statutory and regulatory requirements and delivers on what matters most to our customers. Our proposed £13.7 billion totex plan is both ambitious and stretching. The investment in our asset base will result in significant growth in our RCV, at 8.7% per annum, which equates to over 50% nominal across the AMP.”

Financing the plan

Commenting how the AMP8 business plan will be financed. United Utilities emphasised its strong balance sheet, saying it approaches the plan from a robust position, with one of the lowest gearing levels in the sector at 58% today. Ithe utility says the 58% gearing provides the flexibility to finance the full plan with average gearing of 65% over the AMP and without assuming any new equity.

“This uniquely positions us to tackle the challenge of delivering and funding our investment programme in AMP8 and beyond, and what is clear is that we have options and flexibility around funding this capital requirement,” the company said.

In order to align with Ofwat’s methodology, United Utilities’ PR24 submission assumes that the programme is funded with equity and debt, with equity sized to maintain a sector-leading current A3 rating with Moody’s /A- senior unsecured debt rating with Fitch.

The company said that in recognition that the water sector regulator will be updating the WACC assumption for draft determinations next summer, it has adopted Ofwat’s ‘early view’ cost of capital in its business plan submission. On this regulatory basis, the PR24 submission assumes notional equity of £1.35 billion, out of a total capital requirement of around £5.2 billion, giving rise to average gearing across the AMP of 63%.

Alternatively, according to United Utilities if the investment programme was funded entirely with cash and senior debt, it would expect gearing to average around 65% across the AMP. This is based on the full £13.7 billion totex plan, coupled with Ofwat’s early view WACC. It also assumes a continuation of the current dividend policy, and no outperformance or rewards.

Ofwat set out its early view on the cost of capital to provide companies and investors with a clearer view on what Ofwat considers to be a reasonable rate of return in PR24. The ‘early view’  of 3.29% is higher than the Ofwat PR19 and the Competition and Markets Authority (CMA) PR19 numbers.

Commentimg in a presentation to analysts this morning, Phil Aspin, Chief Financial Officer at the water company cautioned that Ofwat’s early view of WACC may not be high enough to attract the level of investment required in AMP8.

By way of illustration, if the WACC was c.60 bps higher – in line with an AMP8 independent WACC assessment undertaken by Frontier Economics c.3.9% – the company would see average gearing levels around 1.5% lower across the AMP. If adaptive planning decisions led to a £1 billion deferral of totex into AMP9, then that would result in a further 1% reduction on average. The combination of both would see group gearing averaging 63% over the AMP, and remaining within United Utilities’ target range of 55-65%.

Next steps

“Our plan today represents an important milestone in the price review process and will frame ongoing discussions as we continue to work with regulators and Government. What is clear is that we have options and flexibility to fund the capital requirement,” a statement issued today by the company says.

United Utilities expect Ofwat to publish draft determinations in May/June 2024 and final determinations in December 2024. As in previous price reviews, the company will announce its dividend policy following final determinations.

Current trading is in line with the group’s expectations for the year ending 31 March 2024.