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(Alliance News) - Water and wastewater service providers United Utilities Group PLC and Severn Trent PLC on Wednesday pleased analysts with trading updates, as they touted their positive rankings for environmental and customer performance.
"For once, water companies were making positive headlines as United Utilities and Severn Trent reported positive operational performance and, crucially, suggested they were on track to hit forecasts. The sector has been under a cloud thanks to the much-criticised practice of discharging raw sewage into rivers and seas," said AJ Bell's Russ Mould.
Warrington-based United Utilities serves the North West of England, while Coventry-based Severn Trent serves the Midlands and parts of Wales. Both are FTSE 100 index constituents, with GBP6.91 billion and GBP7.42 billion in market capitalisation, respectively.
United Utilities shares were down 1.3% to 1,013.50 pence early Wednesday in London, while Severn Trent shares were down 0.6% at 2,480.00p.
United Utilities said it has put in a "strong operating performance" since its interim results in November, meaning there is no material change to its guidance for the financial year that ends on March 31. At the time it said it expected an about GBP150 million increase in revenue from GBP1.82 billion in financial 2023. The company will release its annual results on May 16.
Severn Trent similarly said it had a "robust financial performance in line with expectations" since its November interims, and there is not material changes to its outlook for the financial year ending March 31. It had said it continued to expect growth in adjusted earnings per share. Severn Trent will publish its full-year results on May 22.
With both companies noting high rankings for customer service and pollution prevention, they expect to receive outcome delivery incentive awards in the current year from the UK regulator.
United Utilities did warn that the 14 named storms in 2023, including 9 since the end of September, hurt its ODI performance by about GBP25 million. Net ODI outperformance is expected to be about GBP40 million in financial 2024.
"Still, this should go a long way to offsetting the roughly GBP60 million higher underlying operating costs the group's anticipating this year, with power, labour and chemical costs being called out as the main bugbears at the half-year mark," said Aarin Chiekrie, equity analyst at Hargreaves Lansdown.
Severn Trent said it continued to guide at least GBP50 million in ODI rewards in the current year, despite counting 10 named storms since September.
On environmental performance, United Utilities said it improved its Sustainalytics ESG risk rating in 2023, placing it 12th out of about 700 utilities globally. Severn Trent said it had zero serious pollution incidents in the past year, allowing it to retain its four-star status in the UK Environment Agency's annual environmental performance assessment for a fifth consecutive year.
However, Louis Knight, analyst at Third Bridge, said a "dark cloud" hangs over the sector due to ongoing Ofwat and EA investigations.
"A dark cloud hangs over the UK water utility sector. Ongoing investigations by Ofwat and EA scrutinize sewage overflows from six companies—Northumbrian, Thames, Yorkshire, Pennon, Wessex, and Anglian. Potential fines, up to 10% of turnover, could exceed tens of millions for each. Our experts say it is about unconsented spills into rivers and local areas that were not previously permitted by the authorities," Knight said.
"In addition, this period consists of the largest investment plan in history due to Ofwat's new regulatory period PR24 or AMP8 because infrastructure investment from UK-regulated water utilities has arguably been too little across the board. The gearing ratio is on average roughly 60-70% despite significant investment needed over the next 10 years. Third Bridge experts point towards key challenges in raising capital and delivering on huge infrastructure expansion and retrofitting plans against the backdrop of a very constrained supply chain and labor market."
By Sophie Rose, Alliance News senior reporter
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