United Utilities reported half-year revenue of £982.0m, up 6.8% from last year. This increase was largely driven by inflation-linked increases allowed as part of the group's revenue cap, while higher levels of consumer consumption also provided a smaller contribution.
Underlying operating profit grew at a slower rate than revenue, rising 4.9% to £271.1m. This was due to inflationary pressures having an even larger impact on costs, particularly power, labour and chemical costs.
Net debt increased by 9.1% to £8.5bn. Free cash flow fell from £77.2m to £24.1m as a result of slightly lower operational cash generation and higher levels of investment.
Full-year revenue guidance has been reiterated, expected to rise by around £150m from a base of £1.8bn, more than offsetting the anticipated £60m increase in underlying operating costs.
An interim dividend of 16.59p per share has been announced, up 9.4% on last year.
The shares fell 1.1% following the announcement.
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Our view
In return for providing a reliable and affordable water supply to Northwest England, Ofwat allows United Utilities to earn an acceptable financial return.
At the half-year mark, an inflation-linked increase in the group's revenue cap as well as an uplift in consumer consumption levels meant that revenue came in ahead of last year. But inflation's also pushing up costs, meaning not all the bumper revenues are flowing through to the bottom line.
United Utilities is also on track to deliver its best-ever year on customer outcome delivery incentives, which are effectively bonuses for delivering above and beyond their committed levels of service. These bonuses look set to double to more than £50m this year, which should help to offset some of the higher costs the group's currently facing.
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, so in the meantime, we're seeing cash flows and earnings get squeezed.
The balance sheet remains stable despite the increased infrastructure spending. Given the group's ambitious £13.7bn plans to expand and upgrade its assets between 2025-2030, United Utilities needs to raise around £5.2bn of cash. That'll require issuing new debt and will likely push debt levels towards the top end of its target range.
Customers' ability to pay their bills as the cost-of-living crisis persists is also something to be wary of. So far this looks under control and there's government support 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.
While high levels of inflation could put a strain on some areas of the business in the short term, it's likely to be a net benefit over the long term. That's because inflation increases the amount of revenue the group's allowed to earn on its asset base, which is measured by Regulatory Capital Value (RCV). The mammoth investment plan should help on that front, raising RCV by 50% by the end of the decade.
The valuation is now well above its long-run average, which is understandable given its defensive characteristics. But the high valuation also adds pressure and increases the risks of ups and downs should any missteps occur.
United Utilities key facts
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