Water sector regulator Ofwat has published its fifth annual report on the financial returns and financial resilience of water companies.

Ofwat said the report is intended to enhance the transparency and accessibility of each company’s financial performance and the financial structures in the sector by sharing key metrics, rather than drawing any conclusions on the financial performance of any individual company.

The report highlights the importance of companies:

• Having robust and resilient financial structures in place
• Being transparent about reporting dividend payments and demonstrating the link between payments made and delivery for customers on performance
• Managing all their liabilities responsibly - including pension deficits

On credit ratings metrics, the report shows that as at 31 March 2020, six companies have their lowest rating on negative outlook (Anglian, Yorkshire, Affinity, Bristol, Portsmouth and SES Water), with Northumbrian having its Baa1 rating with Moody’s under review for downgrade – this remains the case at the date of publication of this report. Southern has its lowest credit rating at the minimum investment grade (BBB-/Baa3).

Most companies’ licences include a requirement with respect to maintaining an investment grade credit rating. The red line shows the level of the minimum investment grade level (BBB-/Baa3) that meets this requirement.

Typically, each company maintains a credit rating with one or more of Moody’s, S&P and Fitch. The credit ratings shown in the chart reflect those reported in the Annual Performance Report, which requires the lowest rating to be reported where a company is rated by more than one agency.

South West’s and Hafren’s licences do not require them to maintain a credit rating. However, their licences require the company’s board to certify that each would be able to maintain an investment grade credit rating along with the main factors, including financial ratios, the board has taken into account to come to its conclusion. 

Ofwat challenges companies to take steps where necessary to improve their financial resilience - such as by reducing gearing or by reducing dividends to retain equity in the business – to protect customers’ interests.

The regulator said it expects investors to earn a reasonable return on their investment, reflecting their delivery for customers and the environment.- however it is important that the returns are transparent.

The report reflects that any dividend, in whatever form and however it is paid, represents a part of a company’s total gross dividend yield.

The report also captures the position on pensions and underlines companies’ responsibilities to manage all their liabilities responsibly - including pension deficits. While many companies’ accounts show a reduction in pension deficits at 31 March 2020, these reductions may reverse and may not be fully reflective of the underlying liabilities of the schemes. Companies need to take account of the impact of any potential underlying liabilities when considering their financial resilience.

Aileen Armstrong, Senior Director at Ofwat commented:

“Some water companies have more work to do to ensure they remain financially resilient. It is vital that companies ensure they have robust capital structures in place and are transparent with the information they provide to customers and wider stakeholders.

“We continue to engage closely with the sector to monitor and challenge companies where we see gaps in their identification and management of financial risk.”

Click here to download the report in full