Regulator Ofwat announced that it has closed an enforcement case into Yorkshire Water after the company agreed “a structured plan to strengthen its financial resources in the interests of customers.”
Ofwat said this will involve Yorkshire Water “recovering two loans that it had made to other companies within its wider company group, totalling around £940m.”
Yorkshire Water’s ownership structure includes a Jersey-registered holding company called Kelda Holdings Ltd and German investment firm DWS, private equity fund Corsair Capital and Singaporean sovereign wealth fund GIC.
In addition to bringing this equity back into the regulated business, Ofwat said Yorkshire Water “has made further commitments to improve its financial resilience and shareholders will invest an additional £100m to reduce spills from storm overflows.”
Ofwat said it opened the case due to concerns about the loans Yorkshire Water had made to other companies within its wider company grouping.
The regulator said it “wanted to ensure that these inter-company loan arrangements complied with requirements in Yorkshire Water’s licence that are intended to protect customers and ensure that the regulated company has the resources it needs to deliver its services effectively, including having appropriate consent from Ofwat for such loans.”
In November 2021, Ofwat’s Monitoring Financial Resilience report concluded that Yorkshire Water had “weak levels of financial resilience and had work to do to strengthen this to the level reasonably expected of a provider of essential public services.”
Ofwat said customer service and the environment can suffer if a company with poor operational performance does not have the financial flexibility to turn around poor performance.
“During the investigation Yorkshire Water took steps to address Ofwat’s concerns about the loans,” said the regulator.
“The structured repayment plan and additional commitments Yorkshire Water has put forward have both addressed these concerns and secured additional benefits for customers.
“Yorkshire Water has provided these commitments as an enforceable undertaking under section 19 of the Water Industry Act 1991.
“As a result, Ofwat has closed its investigation and will now monitor the delivery of the undertakings. Ofwat will not hesitate to act if the commitments are not met.”
Ofwat chief executive David Black said: “Companies must be financially resilient if they are to tackle the challenges that affect customers and the environment.
“We are pleased that Yorkshire Water recognised our concerns and is taking these active steps to improve its financial position in the interest of customers.
“We welcome the additional £100m shareholder funded investment to take urgent action to reduce spills from storm overflows.”
In a stock exchange statement, Yorkshire Water said: “Yorkshire Water announces today that it has agreed with Ofwat that intercompany loans owed by another Kelda Group company, totalling £941.3 million on 31 March 2022, will be repaid by March 2027.
“It is anticipated that the repayment will include capital injections and cash generated in Yorkshire Water that could otherwise have been distributed to shareholders via dividends.
“A portion of this, c.£100 million will be invested during the remainder of AMP7 to reduce storm overflow spills.
“These two measures combined, will further strengthen the operational resilience and financial resources of Yorkshire Water for AMP8.
“The investment to reduce storm overflow spills will look to achieve a minimum reduction of 20% in permitted spills per year by March 2025 from the 2021 baseline.
“The intercompany loans were originally made in connection with the acquisition of Kelda Group plc in 2008 and are excluded from the calculations of reported gearing and interest cover for covenant purposes.
“It is anticipated that reported regulatory gearing will reduce to no higher than 72% at the end of AMP7 and interest cover will improve as these loans are repaid.
“Yorkshire Water’s shareholders have agreed to support the repayment of the intercompany loans and the additional investment to reduce storm overflow spills.
“This means shareholders will have foregone dividends for nine years during AMP6 and AMP7.
“It demonstrates the shareholders’ continuing commitment to invest in improved performance at Yorkshire Water, to protect the environment and to ensure the financial resilience of the business into the future.
Yorkshire Water and Kelda Holdings CEO Nicola Shaw said: “We understand the importance of continuing to have robust financial structures in place and believe that the repayment of the intercompany loans will continue our resilience into the future in a time of significant external economic uncertainty.
“Our shareholders have committed to helping us make this repayment, including the additional investment in storm overflows which will have a significant impact on our rivers and coastlines here in Yorkshire.”