Water industry regulator Ofwat has launched a new consultation on how the water companies should demonstrate their long term financial resilience.
The consultation follows on from Ofwat’s consultation in July last year on proposals for the financial monitoring framework that forms part of a suite of company monitoring tools which Ofwat has put in place.
One of the proposals was that regulated companies should stress test their financial plans and publish the results to demonstrate that they are financially resilient over the longer term. The responses to the consultation raised a number of concerns relating to the publication of that type of information.
While the water companies agreed with the need for this, Ofwat said they had indicated that they had "significant concerns" about publishing this type of data due to it being commercially confidential or even price sensitive in nature.
Publishing results of stress tests to be dropped
According to Ofwat, the results of this type of stress testing reveal how sensitive companies’ plans are to the financial assumptions used when preparing them. They also reveal how much financial headroom exists within companies’ plans (i.e. how much would a company’s financial position change before it would breach the financial covenants that are included in its borrowing documents or is unable to maintain an investment grade credit rating).
The regulator said it had received a number of responses raising concerns relating to the publication of that type of information, particularly for the listed companies. The main concerns were in relation to the commercial sensitivity of this type of information or that it could be seen to be a profit forecast which would breach the listing rules for the listed companies.
The regulator subsequently held a number of workshops with companies and other stakeholders where alternative approaches to demonstrating companies’ long term financial resilience were considered.
Alternative approach is to publish an "explicit statement" in statutory and regulatory accounts
This latest consultation considers an alternative approach and seeks comments from interested parties on the new proposals.
Introducing the consultation, Ofwat said:
“We continue to believe that it is appropriate for companies to undertake stress testing on their financial plans. We are not however proposing that they publish the detailed results of these stress tests.”
“Instead we propose that companies include an explicit statement in both their statutory and regulatory accounts setting out the processes undertaken to enable Boards to make both informed decisions at yearend that companies are financially resilient and to document a robust long-term viability statement.”
Ofwat is now seeking stakeholders views as to whether the revised proposals will provide the assurance it requires demonstrating that companies are financially resilient over the longer term.
The regulator is proposing that companies should include the first statement of this type in both their statutory and regulatory accounts for the 2015-16 financial year.
Deadline for submission of responses is 25 February 2016 – click here to access the consultation document.
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