United Utilities has accelerated its capital investment in the first year of AMP6 which is expected to be around £800 million for 2015/16, according to its latest trading update published this morning.

The water company said it had accelerated investment in the first year of the new regulatory period to deliver early operational benefit and mitigate potential penalties under its outcome delivery incentives (ODIs), which it said represent “a set of tough performance targets.”

 In light of this, regulatory capital investment for 2015/16, including infrastructure renewals expenditure (IRE), is expected to be around £800 million.

United Utilities explained that the early investment along with a strong management focus is leading to further improvement in its underlying operational performance, particularly in its wastewater business. As a result, the water company is on track “to mitigate the majority of the downside risk” of its ODIs for this year.

The utility is also continuing to invest in its ‘systems thinking’ approach, which integrates the use of assets, leverages data intelligence and employs new work processes and technology. United Utilities said it will be rolling out additional new capability later in the year to support its drive for further improvement.

Commenting on customer satisfaction, United Utilities said its customer focus is continuing to deliver underlying improvement in customers’ satisfaction with its services, building on the significant improvements delivered in previous years.

Acknowledging the water quality incident last summer which “understandably led to a reduction in customer satisfaction around the time of the incident”, the water company said its underlying performance shows improvement, saying:

“We were particularly pleased to learn that customers continue to rate us highly on wastewater services, notwithstanding the unprecedented flooding experienced in the North West during December last year. Overall, our service incentive mechanism (SIM) scores have improved slightly compared with last year.”

Reported operating profit will be impacted by additional costs and asset impairments incurred in relation to the December 2015 flooding although United Utilities expects the charges to be largely offset by insurance proceeds. Overall, the firm is not expecting the extreme weather events to have a material impact on its ODIs. 

Underlying operating profit for 2015/16 is in line with management expectations, albeit lower than 2014/15. United Utilities said this reflects the new regulated price controls, an expected increase in IRE, depreciation, employee and other operating costs, partly offset by a reduction in bad debts and regulatory fees. 

Group revenue is expected to be marginally higher than last year, as the impact of lower allowed regulated revenue for 2015/16 is more than offset by higher than assumed volumes and an increase in sales in our non-regulated business.

Costs relating to business retail market reform are expected to be around £10 million for the full year, of which £5 million was recognised in the first half. United Utilities announced on 1 March 2016 that it had entered into a joint venture agreement with Severn Trent to combine the two companies’ non-household water and wastewater retail businesses, principally comprising billing and customer service activities, into one business, to be centrally located in Stoke-on-Trent.

The joint venture is subject to clearance from the Competition and Markets Authority, which is expected later this Spring.

The Group said it expects a modest increase in group net debt at 31 March 2016 compared with the position at 30 September 2015. This principally reflects capital expenditure, payment of the 2015/16 interim dividend and payments in relation to interest and tax, largely offset by operational cash flows. However, United Utilities said:

“Gearing remains comfortably within our target range of 55% to 65% net debt to regulatory capital value, supporting a solid A3 credit rating for United Utilities Water.”

Current trading is in line with the group’s expectations for the year ending 31 March 2016. United Utilities will announce its 2015/16 full year results on 26 May 2016.