United Utilities confirmed that full-year underlying earnings per share (EPS) is expected to land in line with prior guidance of around 100p.
The group is changing the way it measures its inflation-linked debt to smooth the effects of unusually high or low inflation, and its impact on the income statement. This is expected to reduce this year’s underlying net finance expense by £35mn and increase underlying EPS by around 5p above the previously mentioned 100p figure.
Looking ahead, the group has hedged 100% of its electricity needs for Summer 2026, and over 90% of its needs for Winter 2026/2027.
The shares rose 2.3% in early trading.
Our view
In a short trading update ahead of its full-year results, United Utilities confirmed that its underlying earnings per share guidance remains on track. Alongside news that prices for most of its electricity needs for the coming year are already locked in, reducing its exposure to volatile energy prices.
In return for providing a reliable and affordable water supply to Northwest England, Ofwat allows United Utilities to earn an acceptable financial return. Over the medium term, the group's allowed to increase prices alongside inflation, providing a natural hedge to rising costs. The caveat here is that the funds are only received two years later.
The positive impact of these high inflation-linked increases is expected to fuel double-digit revenue growth this year, more than offsetting higher costs and helping profits grow at a faster pace. That’s a tailwind that looks set to continue in the near term and beyond, with 32% increases in pricing mandated by 2030 to help cover investment commitments.
United Utilities received an Outcome Delivery Incentive (ODI) payment in each of the last five years. ODIs are bonuses received for delivering above-and-beyond committed levels of service to customers. That figure is set to swing to a penalty this year, as new regulation raises the bar on what utility companies must deliver for customers. That highlights the need to move quickly to build out its infrastructure, improve service, and reduce spills.
The balance sheet remains stable, with debt levels in the middle of the group’s target range. This helps support the group's ambitious £13bn plans to expand and upgrade its assets between 2025-2030. However, United Utilities still needs to raise a large chunk of cash, which will require issuing new debt and likely push debt levels towards the top end of its target range.
With more price rises ahead, affordability pressures impacting customers' ability to pay their bills is also something to be wary of. The company has set aside more than £0.5bn of cash to help support customers, with additional government funding in place. But United Utilities is calling for this to be more fairly distributed, with some of the country's most deprived communities being within the areas it services.
All in, the group runs a tight ship, with some of the best margins relative to peers. Its regular cash flows and inflation-linked revenue are enviable assets to have in an uncertain environment. But the group's not immune to missteps. Mammoth investment plans, adverse weather and sewage leaks could continue to present challenges, and increase the risk of reputational damage.
Environmental, social and governance (ESG) risk
The utilities industry is high-risk in terms of ESG. Management of these risks tends to be strong, with European firms outperforming their overseas counterparts. Environmental risks like carbon emissions, resource use and non-carbon emissions and spills tend to be the most significant risks for this industry. Employee health and safety and community relations are also key risks to monitor.
According to Sustainalytics, United Utilities’ management of ESG risk is strong.
In 2023, it was a lead performer in preventing pollution incidents, with the lowest number of incidents relative to peers per 10,000km of sewers. However, United Utilities’ ageing infrastructure means it’s exposed to climate impacts such as heavy rainfall and flooding. It has also been implicated in occasional drinking water contamination issues and some releases of untreated sewage, resulting in an ongoing investigation by regulators.
United Utilities key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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