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United Utilities - large investment pipeline planned this decade

United Utilities confirmed that trading is in line with previous expectations.

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United Utilities confirmed that trading is in line with previous expectations. Full-year revenue is set to rise by around £150m from a base of £1.8bn.

The business plan covering 2025-2030 has been announced. Plans include £13.7bn of investment, driving 50% growth in its regulatory asset base over the period.

The investment plans will require the United Utilities to raise around £5.2bn of cash.

The groups targeting a 25% reduction in leakage events over the decade to 2030. Affordability schemes worth £525m have also been announced and should help more than 1 in 6 struggling customers.

The shares rose 1.9% following the announcement.

View the latest United Utilities share price and how to deal

Our view

With the new regulatory period looming (2025-2030), water utility companies are submitting their plans to the regulator, Ofwat. In return for providing a reliable and affordable water supply to Northwest England, Ofwat allows United Utilities to earn an acceptable financial return.

But lower water usage by customers more than offset the group's higher allowed revenue last year, causing total revenues to decline. Combined with extreme weather and high inflation levels which pushed up operating costs, it wasn't surprising to see profits fall.

That trend's expected to reverse this year, with revenue growth set to outpace rising costs. Over the medium term, the group's allowed to increase prices alongside inflation. And if the amount of water it bills its customers for falls below a certain threshold, the regulator will pay United Utilities the difference. The caveat here is that the funds are only received two years later, so in the meantime, we're seeing cash flows and earnings taking a hit.

The balance sheet remains stable for now, but given the group's ambitious £13.7bn plans to expand and upgrade its assets, United Utilities needs to raise around £5.2bn of cash. The group's hoping that this can be done via debt, therefore avoiding the need to issue new equity shares. But that plan would see the group's gearing level (the proportion of net debt to regulatory assets ) move up to 65%, right at the very top of the target range.

We think that could put pressure on the group's dividend policy, which calls for growth in line with inflation. As always, no dividends can be guaranteed. Inflation could also impact customers' ability to pay as the cost-of-living crisis persists. 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.

Replacing over 925km of pipes is no mean feat, but once complete this should drastically reduce the amount of sewage being spilt into rivers and seas - something which regulators have the power to impose huge fines for.

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

All ratios are sourced from Refinitiv. 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 Refinitiv. 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.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 2nd October 2023