Proactive Investors - The UK water regulator has issued another warning about the financial resilience of a number of companies in the sector and said some companies did not fully meet its expectations in explaining dividend decisions and payments.
Ofwat, in the Monitoring Financial Resilience report 2022-23 it published today, continued to red-flag Thames Water, while Southern Water, SES (Sutton and East Surrey) Water and South East Water were also cited as companies that need to take action to shore up their long-term finances.
A liquidity crisis at Thames Water in the summer, where the watchdog warned the company had "significant issues to address", sparked wider concerns about the longer-term debt burdens in the sector, given the £100 billion of environmental improvements the industry says it needs to make.
In today's report, Ofwat said Thames Water still "needs to strengthen its financial resilience and deliver a turnaround in performance" while Southern Water, SES Water and South East Water have been categorised as a "higher priority for engagement and monitoring".
Over the past two years, Southern Water has received £905 million of equity investment and Thames Water has received £500 million with shareholder agreement for further equity support.
"Although positive steps have been taken, both companies remain in our Action Required category as they deliver against respective turnaround plans."
Like Thames Water, Ofwat said South East Water has been moved into the same category "reflecting increased financial pressures which sit alongside a weakening in operational performance".
SES Water remains in this category as its financial metrics remain "under pressure", though the company’s shareholders have provided an equity commitment, while they undertake a strategic review of the business, which is expected to support an improvement in financial resilience.
Portsmouth Water and Yorkshire Water were taken out of the higher priority category but the watchdog said it continues to monitor their progress on a targeted basis.
On dividends, Ofwat's report said that overall, there had been an improvement in companies’ articulation and transparency of dividend policies and decisions, with companies setting out and quantifying the components of their dividend and how they consider the amount to be supported and impacted by out and underperformance.
"There are some companies that did not fully meet our expectation in explaining dividend decisions and payments," it said, but more detail will be published after feedback has been given and taken from all companies.
Anglian, Severn Trent PLC (LON:SVT), United Utilities Group PLC (LON:UU), South Staffs and SES Water declared a dividend that is explained as relating to performance across multiple years, it noted.
Hafren and Affinity did not declare a dividend in the year to support future investment, while Southern Water had determined not to pay a dividend with the company also in cash lock-up under its financing arrangements and Dŵr Cymru did not pay a dividend as it does not have equity shareholders.
Bristol Water, owned by Pennon Group PLC (LON:PNN), paid a dividend of £64.1 million, of which £61.1 million was paid to simplify the financing structure of the Bristol Water corporate group as part of its acquisition.