FY20 trading in line UU has released a trading update ahead of its FY results on 22 May. Current trading is line with group expectations for FY20. Underlying operating profit is expected to higher than in FY19 (we have a 6.8% increase), net debt is expected to be flat vs. the Sep-19 position (in line with our expectations), but higher inflation will push the cost of RPI-linked debt, with underlying net finance expense c.£15m higher than in 2018/19, albeit not out of kilter with an £11m increase posted in 1H20. Increased credit spreads will significantly increase the IFRS pension surplus. Accelerated depreciation of £80m on bioresources to be booked, but excluded from underlying profit measures. Storms hit ODI expectations by £10m No material incremental costs are expected from the winter storms, but service interruptions will impact ODIs, and UU now expects an AMP6 ODI net reward of £40m, vs. a previous expectation of £50m. In theory regulation offers volume protection, but these are unprecedented times – we cannot rule out impact The economic situation is impacting the recovery plan at UU’s Water Plus JV with Severn Trent, as the ability of business customers to pay has been affected, and the recovery plan will be ‘far more challenging, take longer, and be less certain’. This suggests downwards pressure at the income from JV line over the next few years. We also question whether there will be pressure on wholesale revenue recovery from the business segment, which amounts to £45m/month for UU. Although volumes are subject to a true-up mechanism two years later, these are unprecedented times, and it might not be as simple as applying the current mechanisms. Ofwat/MOSL have mentioned ‘pain sharing’, and should there be widespread insolvencies, pursuing those who cannot pay might not be an appropriate course of action, and maybe consideration should be given to volume voiding, with some kind of mutualisation of the impact across the industry with perhaps a longer-tailed recovery of the volume impact. The legitimacy of water companies and the regulation will be tested like never before. Such a scenario would see a near-term P&L impact, with a positive boost in future years. UU has indicated that it has a robust liquidity profile extending out 24 months.