UU could face £20m hit over parasite problems

United Utilities could face a £20 million financial hit as a result of parasite problems which forced the company to issue a boil notice to its customers in Lancashire.

UU’s Franklaw water treatment works was last week found to contain low levels of the cryptosporidium parasite, forcing UU to advise its customers to boil their drinking water as a precautionary measure.

Although the plant is now believed to be producing “high quality water” again, the boil notice will remain in place until next Tuesday. And the company may face steep penalties as a result.

Analysts at RBC Capital said it may be too soon to quantify the financial impact for the company before it is understood how the parasites entered the water system, but the potential loss to the company’s regulated capital value (RCV) could reach £20 million.

In UU’s AMP6 outcome delivery incentives (ODIs) there are two indicators which could be impacted by this event, the analysts said, including the Drinking Water Inspectorate’s category 3 water quality event standards and the water quality service index.

“These two are penalty-only ODIs, which on a P10 basis can have a cumulative impact of just over £20 million. This impact can be an adjustment to revenue or RCV in AMP7,” RBC Capital said.

“[F]or context, this represents 0.2 per cent of UU’s over £10 billion FY16E RCV,” the analysts said, but added that the value creation lost is probably higher once the stream of revenues the £20 million of RCV could have generated for UU is considered.

Speaking to Utility Week on Monday, UU customer services director Gary Dixon said he does not believe that there are faults with the treatment works and that the problem lies “somewhere else”.

Earlier this year Bournemouth Water was found guilty of supplying water “unfit for drinking” after its supply was found to contain low levels of the same parasite found in UU’s supply, resulting in a fine of £85,000 and £48,772 in legal costs. The company was also forced to invest £3.5 million in a new ultraviolet plant at its treatment works within months of the outbreak.

If UU faces a legal challenge over the infestation, this will be its second high profile court appearance this year after it was found guilty of “reckless failure” for allowing raw sewage to flow into an estuary, resulting in a £750,000 fine.

The source of the recent parasitic contamination is currently under investigation by UU and the DWI.