Yorkshire Water has announced its intention to reduce borrowing and simplify finances as part of a long term drive to enhance service for customers. The utility's offshore banking arrangements, which are used in the sector to manage high levels of borrowing, are to be wound up.

The water company’s gearing, which currently equates to 76% of its total asset value, is set to fall to 70% by 2020, reducing interest costs and creating headroom for investment in improvements to customer services, both in the next two years and also over the longer term.

Offshore banking arrangements, which are used in the sector to manage high levels of borrowing, are to be wound up. Measures are also being taken to reduce annual interest costs by strengthening the water company’s balance sheet.

Yorkshire Water said it could also be the first in the sector to raise funds by use of a “social bond”, enabling ethical investors to directly finance some of its plans for the next five years. For example, plans to use natural flood management techniques to reduce flood risk for customers in Hull, Calderdale and the Aire Valley could be financed by these means.

Firm commits to closing offshore arrangements in the Cayman Islands

The announcement came in a speech at credit reference agency Moody’s 2017 UK water sector conference, by Liz Barber, group director of finance, regulation & markets.

Liz Barber said:

“By reducing what we spend on interest costs it means that we’ll have more money to invest in better service and we hope to announce what this might involve next month. Our shareholders are also committed to this and have shown their commitment by substantially reducing their dividend over the last four years.”

“Customers expect us to provide safe and reliable services and we have a responsibility to have safe and resilient finances so that we meet their expectations. They want to know that we have the flexibility to cope with unplanned events like the last major floods in Yorkshire in 2015. By reducing our borrowing we’re better able to cope with this type of event, which on its own cost some £57m.”

Closing her speech she also committed to close the company’s offshore arrangements in the Cayman Islands:

“There is a real challenge to the water industry’s legitimacy at the moment and complex financial structures only add to public concern as to the way in which companies are financed. We have some offshore companies in our structure which are no longer necessary or appropriate and we’re taking steps to remove these as soon as possible.”

Yorkshire Water currently has a ‘stable’ grade rating from the credit reference agency, Moody’s.

In July Moody’s stated that this “reflects the measures that the company has taken to reduce gearing and improve its long-term interest rate exposure… as well as ongoing reductions in distributions to external shareholders.”

Compared to other water companies, Yorkshire Water’s  average annual bill of £366 is the second cheapest in England and Wales.

The company has a Regulatory Capital Value (RCV), which can be explained as an infrastructure value, of £6,016m, making it the fifth-largest UK water company.