Anglian’s transparency drive

A raft of commitments by Anglian Water will see it “speed up” the removal of its Cayman Islands subsidiary, cut dividends, increase investment and review its corporate structure, says Katey Pigden.

Anglian Water is the latest company to take up the transparency gauntlet thrown down by Ofwat and the government, and its chief executive Peter Simpson has urged other companies to follow suit.

Last month, just a couple of weeks after Anglian was labelled by environment secretary Michael Gove as one of four companies which “make particularly keen use of financial engineering”, it announced plans to embark on a transparency overhaul.

While giving a keynote speech at Water UK’s annual City Conference on 1 March, Gove accused Anglian, along with Thames Water, Southern Water and Yorkshire Water of having “multi-layered corporate structures of dizzying complexity involving multiple subsidiaries, some based offshore”.

It wasn’t the first time Gove had criticised the behaviour and financial structures of the water sector, although it was probably the first time chief executives of water companies were gathered in the same room as he did so.

Gove gave the industry a stern warning to clean up its act, but he also highlighted examples of good practice from companies and some of the achievements the sector has made since privatisation. Anglian was one of a couple of companies, which appeared on Gove’s naughty list but also his nice one. He praised Anglian for issuing the first-ever public utility Green Bond last year to meet the three-fold challenge of water scarcity, climate change and better environmental protection.

Yet the company has clearly recognised the need to do more and on 15 March it publicly made a raft of commitments, which will see it “speed up” the removal of its Cayman Islands subsidiary, reduce dividends, increase investment in resilience schemes and review its corporate structure.

The company hopes its “series of financial and corporate initiatives” will improve transparency, trust and customer confidence. To improve clarity of its financial structures, Anglian plans to repay an inter-company loan to simplify the presentation of its accounts, particularly around real dividends, and aims to complete this by the end of this financial year.

It stresses its Cayman Islands subsidiary “is and always has been” registered in the UK for tax and it has never received any tax advantage from this location, nor has it been used to raise debt finance. “The subsidiary is effectively dormant,” the company says.

Drought and flooding

Anglian also pledges to reduce dividends through to 2025, which it claims will result in a “significant reduction” in the company’s level of debt and gearing. The firm’s current gearing level is estimated to be around 79.1 per cent. By reducing dividends to shareholders, it will invest an extra £65 million, in resilience schemes not included in the company’s original business plan for the current regulatory period, by 2020. The money will be used to improve the region’s ability to deal with drought and flooding.

The company says the commitments build on the £5 billion it has already pledged to invest between 2015 and 2020. “I hope the move will be seen positively by Ofwat and Defra [the Department for Environment, Food and Rural Affairs],” Anglian Water Group’s chief executive, Peter Simpson tells Utility Week.

Although the programme responds to challenges laid down at the water conference in London last month by both Gove and Ofwat chairman Jonson Cox, Simpson insists it is not a “knee-jerk reaction” and is something the company has been working on for several months.

This week (10 April) Cox outlined an agenda of reform to bring the water sector “back in balance” in response to Gove’s previous comments.

Anglian Water is proud of its Responsible Business of the Year accolade which it was awarded in July 2017 at the Responsible Business Awards. Simpson says: “I like to think in the last few years we have behaved responsibly but, somewhere along the line, the narrative has been lost.

“We can’t just look back at the great things, and need to position ourselves in a positive space and move the agenda forward. We’ve put a lot of skin in the game.”

In Cox’s speech at the Water UK conference, he set out a sweeping programme of reforms for water companies, including a radical overhaul of dividends, action on highly leveraged capital structures, and changes to companies’ licences.

Simpson says Anglian’s response to Ofwat “captures the views of all owners of the business” and demonstrates it is “nailing down” firm commitments.

“These are things we were doing anyway and were not purely in response to the comments made.” He explains the firm’s Cayman Islands structure was set up in 2002 and has always been registered in the UK but concedes “It’s not a good name to have”.

“We will simplify the structure as there’s lots of companies on it. These are all clearly laid out in financial reports, but people don’t always see it that way.

“It’s a case of perception and reality. Perception is reality so if people view us in a particular way we need to look to address it.”

He adds: “There is an interesting discussion about the appropriate gearing level for a company. We have proven to be resilient, but the argument has moved on and we have a public duty to go above and beyond.

“We’re hoping for mid-70s gearing in the next AMP – along the lines of what Jonson was indicating. But we’re not waiting until the next AMP to act, we’re cracking on now.”

Big commitment

Simpson says the company’s shareholders and the board have been talking about the series of commitments for some time and suggests they have made “a hell of a commitment”.

“Our long-term shareholders want to continue to invest and they have been supported by our shareholders who have recently joined and made the same commitments.”

Private equity firm 3i Infrastructure agreed to sell its stake in Anglian Water Group (AWG), the parent company of Anglian Water towards the end of last year.

Its stake has been acquired by Dalmore Capital and GLIL Infrastructure – a joint venture between five local government pension funds – after the deal completed last month.

Simpson reiterates: “The good stuff is getting lost, so we have chosen to look at how we can move forward instead of getting stuck in the current argument. I hope other companies will follow suit – I think they will. The change needs to be a sector thing, not just one company.”

Responding to Anglian’s announcement, a spokesperson for Ofwat, adds: “All water companies and their investors need to get on the front-foot by thinking proactively about how to renew trust and confidence in the water sector and meet the high standards of corporate behaviour and resilience that their customers expect of them.”

Anglian’s commitments have been agreed by its board, in conjunction with its pension fund-backed shareholders: First State Investments, Canada Pension Plan Investment Board, IFM Investors, Dalmore Capital and GLIL Infrastructure.

Anglian Water says it will place public interest at the “heart of the business” and will change the composition of the Anglian Water Services board so independent non-executive directors “are in the majority and not just in the largest group”.

Gove acknowledged companies have said they will close their offshore financial arrangements, however, he stressed “excuse-mongering” about how long it will take to wind up the operations “just won’t wash”.

At the conference he reiterated his pledge to back Ofwat and said he would give the regulator “whatever powers are necessary” to get all water companies “to up their game and further lower consumer bills.”

There may have been an eerie silence in the room when Gove directly challenged the sector to be “transparent and accountable” last month and while it may have been uncomfortable to hear what he had to say, water companies were certainly sitting up and listening.

Anglian Water’s commitments

Anglian Water’s shareholders

Anglian Water Group is owned by a consortium of investors made up of:

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