United Utilities is warning that its underlying operating costs for the financial year 2022/23 are expected to rise by £100 million-plus.

The warning comes in the latest trading update the water company has published ahead of its half year results on 23 November 2022.

At the group’s full year results in May, the utility provided detailed guidance on the 2022/23 financial outlook. Since then, the increasing inflationary environment and higher power prices have resulted in “somewhat higher cash operating costs and increased non-cash indexation” on the group’s indexlinked debt, the update says.

United Utilities had previously guided to around an increase in underlying operating costs of around £100 million for the 2022/23 financial year, with around half in relation to previously announced additional investment and half inflationary cost increases.

According to the trading update, inflationary increases in input costs, particularly on chemicals and power, are now expected to be “somewhat higher” than the forecast used to derive the guidance.

In addition, United Utilities now expects the underlying net finance expense for the first half of 2022/23 to be around £135 million higher than the first half of last year, largely as a consequence of higher inflation rates.

The water company is maintaining its existing AMP7 guidance on regulatory performance provided at full year results in May 2022 and is maintaining our ODI guidance for the year, although it cautions that “performance against particular measures can be sensitive to weather and one-off events during the year, and particularly during the winter months.”

Due to moderately lower than forecast consumption, group revenue for the first half of 2022/23 is

now expected to be around 1 per cent lower than the first half of last year. United Utilities expects this lower consumption to continue into the second half of the year - full year group revenue is therefore expected to be lower than the guidance that it gave in May.

The trading update states:

“We actively manage the impact of inflation on our cost base and while we are in a strong position for 2022/23 with wage deals agreed and the majority of our power consumption hedged. As highlighted at our full year results, we started the year with around 10 per cent of unhedged consumption exposed to market rates.

“As a result of these factors, underlying operating costs are now expected to be £65 million higher for the first half of 2022/23 leading to a lower underlying operating profit than the first half of last year.”

United Utilities expects these factors to also impact the second half of the year – the firm is continuing to closely monitor the impact of ongoing volatility in power costs and await clarity on the impact of the Energy Bill Relief Scheme for non-household customers.

The utility is expecting an increase in group net debt at 30 September 2022 compared with the position as at 31 March 2022 which largely reflects the impact of higher inflation leading to a higher indexation of principal on its index-linked debt along with the group’s ongoing investment in its asset base. However, this is partly offset by the expected receipt of proceeds in relation to the previously announced sale of its renewable energy business United Utilities Renewable Energy Ltd.

The utility currently has a solid A3 credit rating for United Utilities Water with Moody’s and for its AMP7 dividend policy.

Commenting on inflation and the cost of living, United Utilities said it recognises the increasing cost of living challenges for customers and continues to offer support through an extensive range of affordability schemes. With £280 million of support available over AMP7 the water company expects to help over 200,000 households to reduce the burden of debt.

The update separately flags up United Utilities’ continued strong environmental performance, highlighting this year’s publication of its road map to better river health in the North West. The company will invest £230 million over AMP7 to improve 184km of rivers - in May 2022

It committed to invest a further £250 million over and above its AMP7 allowance to improve

environmental outcomes.

Listen to Jo Harrison, environmental planning and innovation director, via the WaterBriefing Watch Channel introduce the first in a series of short videos in the run-up up to its IT half year results presentation demonstrating how the firm is using innovative solutions to help tackle some of the sustainability challenges it faces.