Anglian Water’s Chief Executive is warning that Ofwat’s decision on its AMP7 Business Plan, which left the company almost £750 million short, falls far short of the investment required for the next five years.

Peter Simpson was commenting on Anglian Water’s just-published preliminary results for the full year to 31 March 2020.

The utility’s strong performance has driven a projected total of £62.6 million of outperformance payments for AMP6 (2015-2020), based on 2019/20 prices, with £12.5 million of rewards expected for 2019/20.

Fifteen years of upper quartile service delivery have also culminated in Anglian Water being ranked by Ofwat as top-performing water and water recycling company in its 2019 service delivery report, ending the AMP ranked top of Ofwat’s Service Incentive Mechanism, based on ratings from customers, and as reigning Water Company of the Year.

A successful final year of the AMP6 investment programme saw gross capital expenditure for the year of £470.9 million (£250.1 million on capital maintenance, £220.8 million on capital enhancement), compared to £440.0 million in the fourth year of AMP6.

Group revenue increased by £65.2 million (4.8 per cent) on 2019 of £1,419.9 million, consistent with the regulatory pricing mechanism, offsetting reduced demand for both household and non-household customers

Adjusted profit before tax for the period is £74.0 million, up £13.5 million, while profit before tax for the period is £43.6 million, up £81.5 million from a loss of £37.9 million.

Impacts of Covid-19 include delayed start to AMP7 programme

Operating costs ( including impairment losses) rose by £34.8 million (5.5 per cent). The increase reflects a £14 million increase in bad debt charge, primarily as a result of Covid-19, and £5 million of restructuring costs. Increases in below-ground infrastructure repairs and inflationary pressure on costs were partially mitigated by savings from efficiency initiatives.

Steps have also been taken to support the supply chain, including reducing the time taken to pay suppliers, advising small and medium suppliers and issuing key worker permits.

Cash generated from operations of £686.0 million fell 2.1 per cent on last year, reflecting the reduction in cash collection from non-household retailers as a result of the agreement to defer 50 per cent of the March invoice as a result of Covid-19.

The Covid-19 emergency has meant the pausing of routine maintenance and planned infrastructure programmes, delaying the start of the AMP7 programme; there will be an as-yet unknown impact on the company’s ability to meet its Operational Delivery Incentives in the short-term.

No dividend payments to shareholders for second year running

Dividend payments were marginally down on the previous year –dividends paid in the year of £67.8 million (2019: £68.0 million) were retained within the Group and used to finance Group operating costs and working capital needs. No dividends were paid to the shareholders of Anglian Water Group Limited, the ultimate parent company, in the year (2019: £nil).

Based on the available free cash flow there was capacity to pay a further dividend of £192.2 million. However, the Directors have not proposed to pay a final dividend in line with their de-gearing target. Anglian Water said the decision to retain £192 million, follows on from the previous £165 million shareholder investment into the resilience of the company. Both of these decisions reduced shareholders’ returns in AMP6 for the benefit of the company.

“Accepting Ofwat FD would inevitably mean adopting sub-optimal short-term solutions, kicking the can down the road”

Chief Executive Peter Simpson highlighted Anglian Water’s level of concern over Ofwat’s Final Determination on its AMP7 Business Plan, which led to the Board’s unanimous decision to appeal against the regulator’s decision to the Competition and Markets Authority (CMA).

Accepting Ofwat’s decision would inevitably mean “adopting sub-optimal short-term solutions, kicking the can down the road rather than tackling issues head on”, he said.

The CMA’s findings will be published no later than 18 March 2021. In the interim, Anglian Water said it will operate within the funding allocated under the Final Determination, with plans scaled back to reflect reduced investment.

Peter Simpson commented:

“Our stated purpose will provide a strong foundation to deal with the enormous challenges we and others are facing. The global impact of Covid-19 is stark, and it is compounded by the increasing pace of climate change, population growth and a very tough Final Determination from our regulator Ofwat, which poses significant financial challenges for our business, and others in the water industry.”

“In our own region, it will be more important than ever to invest in the resilience of our infrastructure, safeguard our environment and work to bring social prosperity to our communities.

“Yet we must do so for now within the constraints of a Final Determination which falls far short of the investment required for the next five years. Anglian Water’s strong track record of performance is founded in large part on the significant investments we have made in delivering high-quality infrastructure and services over multiple AMPs.”

AMP7 Business Plan endorsed by sector-leading engagement with 500,000-plus customers and stakeholders

Simpson pointed out that the plans set out in its AMP7 Business Plan had been endorsed by sector-leading engagement with more than 500,000 customers and stakeholders, and rooted in externally validated assessments of the region’s needs. They included £6.5 billion of investment to support the long-term resilience of water supplies and the growth of the region.

However, the determination awarded by Ofwat had left Anglian almost £750 million short of the funding required to deliver the plans, as well as setting the lowest ever rate of return to investors, limiting ability to deliver growth in what is the driest and one of the fastest-growing areas of the country.

The Anglian CEO continued:

“Accepting it would inevitably mean adopting sub-optimal short-term solutions, kicking the can down the road rather than tackling issues head on and creating infrastructure fit for the future, as we and our customers agreed that we should. It would lead to poorer outcomes, not just in the next five years but for many years to come, threatening our fundamental ability to deliver on our stated Purpose: to bring environmental and social prosperity to the region we serve.

“That is why we felt we had no choice but to pursue the redetermination process which is now underway with the Competition and Markets Authority. In a post-Covid-19 world, and with the pace of climate change only accelerating, it will be more critical than ever to run our business in a way which drives the long-term sustainability and resilience of our region and our communities. We hope the outcome of the process will allow us to continue to do so.”

Click here to download Anglian Water Preliminary results 2019/20