Our analysis of water companies financial performance 2016-17

We commissioned Economic Consulting Associates (ECA) to analyse and report on the 2016-17 financial performance of the water companies in England and Wales.

This was to provide us with an overview of the companies’ financial performance, highlighting any implications for the 2019 Price Review, emerging risks for consumers, and the extent to which companies are outperforming the cost assumptions made by Ofwat for the 2015-20 price control period.

The key findings include:

Wholesale costs

Ten out of 17 water companies have so far outperformed the allowances for wholesale expenditure built into their price limits for 2015-20. Companies’ efficiencies should be shared with customers when Ofwat makes assumptions of companies’ costs for the 2020-25 price control period.  CCWater will continue to track companies’ wholesale cost efficiencies for the remaining three years of this price control period as we want to see customers get a share of the benefits.

Financing costs

Nine water companies have  been able to raise debt finance at a lower cost than Ofwat assumed, due largely to an increase in inflation. Should companies continue to raise debt at lower costs, there may be a case for these benefits to be shared with customers.

Incentives

For the 2015-20 period, Ofwat introduced Outcome Delivery Incentives (ODIs) which allow companies to earn financial rewards for outperforming specific service performance targets, or incur a financial penalty for any failure.  Across the two years 2015-17,  five companies had net penalties, while 12 had net rewards. Total net rewards almost doubled from £35m in 2015-16 to 68m in 2016-17. Given the scope for rewards to increase water bills, we are pressing for Ofwat and the water companies to ensure that the use of such incentives has customer support.

Pre-tax profit and dividends

In 2016-17, all of the companies saw pre-tax profit margins (as a percentage of their revenue) of between 13.3% to 44.6% (average 31.2%) – lower than the previous year’s average of 33.5%. Across all companies, dividends to shareholder were lower in 2016-17.  Dividend yields were at 7.7% in 2015, but fell to 6.3% in 2016 before rising to 7% in 2017.

We will continue to track water companies’ performance with a view to ensuring:

• Ofwat sets suitably challenging efficient cost assumptions at the 2019 Price Review.
• Companies are challenged to ensure that the use of financial  incentives are supported by customers.
• If financial outperformance continues through the remaining three years of this price control period, we will press companies to share their success with customers – especially for any gains achieved outside of companies’ control. For example, due to increasing inflation.