Four firms need further action to bolster their financial resilience

Thames Water, Southern Water and SES Water remained in the bottom category in Ofwat’s 2022-23 Monitoring Financial Resilience report, published last week, despite all three companies bringing new equity in during the course of the previous year (Thames £500m, Southern £375m and SES £7m). The three were joined by South East Water, which dropped down a ranking compared to 2021-22, on the back of “increased financial pressures which sit alongside a weakening in operating performance”.

For well publicised reasons, Thames is of particular concern to the regulator. Yorkshire Water and Portsmouth Water managed to climb up from the bottom to the mid category. Yorkshire has injected £400m of equity as part of a broader undertakings package. Portsmouth shareholders have put in £120m of £150m pledged to support Havant Thicket. They joined last year’s mid placed firms Northumbrian and Affinity.

All other companies were of no concern to the regulator.

Ofwat’s messaging around the report explicitly set out that the financial resilience pressure it is applying is having an effect: it highlighted that £4.6bn of shareholder equity has been raised or promised to the sector since March 2020, with £1.4bn in the previous year.

There was also an implicit message: that the sector remains attractive to equity, in the context of debate around whether shareholders will be willing to support doubled AMP8 expenditure. Ofwat also pointed out that companies have raised new debt to fund investment programmes and “subscription levels continue to signal investor interest in the sector”.

Ofwat reported that companies declared a total dividend of £1.4bn in 2022-23. It commented: “Some companies must do more to explain how dividend decisions reflect overall performance, alongside investment and financial resilience needs, to meet our guidance.”

Since 17 May 2023, companies have been charged with meeting modified dividend licence conditions, which empower Ofwat to take enforcement action if dividends are out of line with company performance or long term financial resilience.

Companies in each financial resilience category

Standard – no concerns, no action required; routine monitoring.

Anglian, Welsh, Hafren, Severn Trent, South Staffs, South West, United Utilities, Wessex.

Elevated concern – some concern, action may be required; targeted/more frequent monitoring.

Affinity, Northumbrian, Portsmouth, Yorkshire.

Action required – action is either being taken or required; active monitoring.

SES, South East, Southern, Thames.