Ofwat calls out companies over financial transparency

Water companies have been told to be more transparent in their financial reporting.

All bar three companies have been told by Ofwat to make changes to how they present long-term viability statements and dividends.

Companies told to improve their transparency include Anglian, Bristol, South West, Hafren Dyfrdwy, Northumbrian, South Staffs, SES, Southern, Wessex, Welsh and Yorkshire.

Ofwat called for improved transparency around financial resilience and dividend payments with the majority of companies told to improve the clarity in long term viability statements, particularly on stress testing and modelling.

In 2019, these statements came into sharper focus ahead of PR19 when Ofwat called for a step change in how companies evidence the board’s involvement in long-term plans.

The regulator said companies should have robust financial and operational plans that are stress tested and cover an appropriate forward looking period.

The majority of companies that paid a dividend for 2021-22 were asked to transparently set out and explain to stakeholders how dividend policy is applied and payments calculated. The regulator called out companies for not adequately reflecting broader company performance when calculating dividend payments.

South East, Thames and United Utilities were each “generally in line” with expectations on dividend payments. Affinity, Hafren Dyfrdwy, Southern and Welsh did not pay a dividend.

Meanwhile the regulator questioned Anglian’s £9 million deduction from its £169 million dividend. The deduction was made to reflect outcome delivery underperformance, but Ofwat said there was no explanation as to how the value was calculated.

To South West, the regulator questioned the insufficient details on performance regarding the dividend of £43 million on outperformance, particularly when underperformance was reported across some commitments.

The regulator highlighted that financial outperformance was partly driven by inflation and said for PR24 such benefits should be retained or reinvested by the company.

Similarly, Ofwat has ruled that Northumbrian failed to adequately explain how performance impacted dividend decisions, nor did it explain why a 13.2% dividend yield aligns with performance. A level of 4% had been set as reasonable for a company performing in line with Ofwat’s determination.

Ofwat also queried why Portsmouth’s dividend was higher than the guidelines set in the final determination, while SES was called out for not providing clarity around its dividend of 3.5%, which Ofwat queried the reasonableness of given the company’s overall performance and financial resilience during the year.

South Staffs was judged to have failed to sufficiently set out how its £5.2 million outperformance dividend reflected broader performance. Ofwat noted the majority of Totex outperformance related to a funded pension deficit repair that is now in surplus and argued this did not represent genuine outperformance.

Ofwat said Severn Trent did not meet the current expectations around dividends as it did not sufficiently detail how broader company performance.

Wessex’s dividend also did not meet expectations, on the grounds that the company did not justify why a 5.3% yield was set above the 4% recommended in the determinations. Ofwat questioned how it aligned with underlying company performance for 2021-22 and how it was reasonable in the interests of customers.

Ofwat said the matter of dividends would be raised directly with any companies identified as a “lagging behind” in the Water Company Performance Report.

The regulator has introduced several measures to improve financial resilience, including powers to block dividend payments, if a company’s finances were found to be insufficiently secure.