Equity injections bolster firms but only two move financial resilience category

(by Verity Mitchell)

Ofwat has published Monitoring financial resilience, its report assessing the stability of the water companies in England and Wales for the year to March 2026. Although it is backwards-looking, it provides interesting comparative data.

Shareholders have injected £1.8bn of equity into the companies and have pledged a further £1.7bn. There have been new investors too: Asterion and EQT have taken stakes in Southern Water and Yorkshire Water respectively. As a result, sector gearing relative to regulatory assets fell slightly to 66% from 68%. Ofwat noted that this is the lowest ratio since 2007.

Ofwat’s risk categorisation has changed for two companies: positively for Northumbrian Water, which is now ‘standard/routine,’ but negatively for Welsh Water, whcih was moved down to the ‘elevated concern/enhanced monitoring’ category given uncertainty about its medium-term funding model.

Although Southern Water has improved its financial resilience (and its shareholders have committed to inject another £300m of equity in 2027), it remained in the ‘action required/active monitoring’ category along with South East Water and Thames. Thames remains in Ofwat’s Turnaround Oversight Regime, reflecting the scale and complexity of its operational and financial challenges. Ofwat noted the ongoing work in relation to Thames’ liquidity, recapitalisation and performance turnaround.

Five companies stayed in Ofwat's 'elevated concern/enhanced monitoring’ category – Affinity, Anglian, Wessex and Yorkshire all continue to have gearing above 70%, while Portsmouth is delivering a substantial project relative to the size of the rest of its business.

Standard/routine monitoring remained in place for six low risk companies: Hafren, SES, Severn Trent, South Staffs, South West and United Utilities, now joined by Northumbrian.

In contrast to improved financial metrics, average sector returns were lower than assumed in the price control because of the companies’ operational underperformance.

Ofwat flagged the £3.4bn of additional funding provisionally allowed under its cost change programme for asset health, housing growth and environmental obligations. The additional £463m of revenue allowed under the Competition and Markets Authority redetermination process will not affect customer bills until 2027-2028, given the timing of the review. 

Six companies did not pay a dividend. Thames, South East and Southern are subject to cash lock-up conditions. Hafren and SES chose not to pay a dividend. Wessex has stated it will not pay dividends for all of AMP8, reinvesting its retained earnings. 

Comment:

This report reflects the challenge of performance improvement to meet the metrics set at PR24. Many companies have not achieved their base returns on regulatory equity. The equity injections reflect the confidence that investors had in the stability of the regulatory regime in the previous financial year. The current government needs to preserve this trust, given that more equity may be required towards the end of AMP8.