Ofwat has published the the first full report produced under its financial monitoring framework which sets out the regulator’s analysis of the relative performance and financial strength of the water and wastewater companies in England and Wales.

The report is based on information that companies published in their annual performance reports for the 2015-16 financial year in July 2016, together with their responses to additional questions that Ofwat asked them about their published data.

The aim of the report is to provide information to interested stakeholders on the relative performance and financial strength of the water and wastewater companies.

The financial monitoring framework was introduced in 2015 to collect, analyse and report on information on the appointed companies which would provide a clear view of their financial performance, solvency, liquidity, risk management and longer-term financial viability and resilience in light of anticipated investment programmes.

Introducing the report, Ofwat said:

“By analysing and presenting the companies’ own data in this way we are seeking to improve the transparency of reporting and the accountability of companies to all their stakeholders. The ability to benchmark each of the appointed companies against their peers, where relevant, will also reinforce the effectiveness of Ofwat and other stakeholders in holding these providers of a vital public service to account.”

“By asking those companies to prepare and publish information in this way both Ofwat and other interested stakeholders will be able to compare performance, identify outliers and provide challenge to appointed companies who are underperforming, or who do not appear to be acting in the best interests of customers, while learning from good practice and those appointed companies which are performing well.”

The report says that Ofwat has not identified any general concerns over the financial resilience of the appointed companies, nor has the regulator identified any specific areas where it needs to intervene to protect customers at this point in time.

The key findings of the review include:

• All companies required to hold an investment grade credit rating are at least two notches above the minimum level required. Ofwat has noted that a number of companies are on negative watch and have reminded the management of those companies that it is their responsibility to ensure that they act to maintain an investment grade credit rating.
• Interest rates information reported by companies indicates there is some variation in the rates that are being paid by companies.  There is one water only company which has reported interest rates which are significantly higher than Ofwat might have anticipated while there are two water and sewerage companies which have reported interest rates which are below the levels Ofwat might anticipate.
• There have been a number of changes in regulatory gearing in 2016 compared to 2015. The review indicates that this is largely as a result of changes made to the RCV by Ofwat as part of the PR14 price review which reflect performance by the companies in 2010-15. There is no evidence that companies have been actively seeking to increase gearing over the last financial year.
• Total pension deficit liabilities at 31 March 2016 are c.60% lower than the levels reported at 31 March 2015. However, the report says that market interest rates have been volatile since the Brexit referendum vote in June 2016 - inflation expectations have changed which may well result in marked increases in those liabilities. Ofwat has set a cap on the level of pension deficit funding that can come from customers and any deficits over and above those levels remain the responsibility of shareholders.

All companies were required to publish a statement on long term viability for the first time in 2016. Companies were required to produce forward looking forecasts and stress test those forecasts. Company boards have made statements that they have considered forward looking forecasts covering periods between three and eight years and have satisfied themselves that the company is financially viable over the specified period.

 In making their statement on long-term viability the report says a number of companies, but not all, have considered a period of five years. Ofwat would “strongly encourage” all appointed companies to consider a period of at least that length in the future.

Regulator will continue to monitor level of dividends paid

Commenting on dividends reported in 2016, the report says some companies are paying dividends which are higher than the levels Ofwat assumed in the PR14 final determinations. The report says the regulator will continue to monitor the level of dividends paid. If companies which have used the levers available to them to resolve short term financeability issues subsequently pay excessive levels of dividends, Ofwat will take this into account at the next price review.

The regulator has also included the financial results of Bazelgette Tunnel Ltd (Tideway or TTT) which is currently constructing the Thames Tideway Tunnel where appropriate. While Tideway is a regulated business, its activities are significantly different to those of the other regulated water and wastewater companies - as a result Ofwat says it not expect its financial performance to be directly comparable with that of the other regulated companies.

The report does not include a detailed analysis of companies’ expenditure – however, Ofwat is planning to publish more information about company performance in respect of totex and outcomes later in the year.

Click here to read the Monitoring financial resilience report 2015-16 report in full