Welsh Water’s performance challenges continue

As Welsh Water released its full-year results, its chairman commented that it has been a challenging year for the business.

Management reported operational and financial performance behind its plan, primarily due to additional costs from severe storm events during the winter, a burst on a major trunk main located under the River Afon Ddu and inflationary cost pressures. Operating profit, excluding depreciation and amortisation, of £383m in the year, fell by £50m, a reduction of 12% relative to the prior year. Operating cash flow of £409m was used to invest £508m in capital assets, an increase of £128m from last year. Gearing increased by 2% to 62%.

Over the course of AMP7, the utility has maintained a gearing ratio of 58% to 62%. In preparing for AMP8, and the significant uplift in investment, the board has reassessed its gearing policy, with the target now re-set higher at below 65%, still substantially below the 85% level required in the company's debt covenants. Management noted that while financing costs have reduced following the easing of inflation, they remain higher than historical averages. Recent debt issuances at 5.75% are higher than its effective cost of interest at 5.1% and compare to 4.7% for the year to March 2024.

The board congratulated itself on having no shareholder distractions and has appointed four new non-executive directors to strengthen its governance. The lack of ownership complexity has not, however, been reflected in environmental performance. The company has improved its performance across several of the 12 metrics used by Ofwat but it retained its status as a ‘lagging’ company in 2024, compared with Thames that improved to average.

It admitted that significant improvement is still required to meet the expectations of its customers, regulators and wider stakeholders. In October 2024, Ofwat imposed a £24.1m penalty for failing to meet key targets related to pollution, leakage and supply interruptions. Management expected to incur a penalty of £46m for poor 2024/25 performance, which will be returned to customers through future bill reductions.

Welsh Water’s AMP8 business plan targets total expenditure of £6bn, a £2.2bn (58%) increase over the 2020-2025 period. This includes £4.2bn in capital investment — £1.7bn more than the previous period. Compared with peers that have appealed their determinations, the statement reiterated that the board believes that Ofwat’s Final Determination strikes a balanced approach, considering risk and return, customer affordability, regulatory requirements, and the sustainability of its operations.