UK water companies continue investment, improve efficiency

A British Office of Water Services (Ofwat) report published today shows that water companies in England and Wales have invested substantially in infrastructure and quality improvements over the past four years while continuing to improve their efficiency...

Sep 29th, 2004

LONDON, Sept. 29, 2004 (GNN) -- A British Office of Water Services (Ofwat) report published today shows that water companies in England and Wales have invested substantially in infrastructure and quality improvements over the past four years while continuing to improve their efficiency.

The report, 'Financial performance and expenditure of the water companies in England and Wales 2003-04', shows that cumulative capital investment from 2000 to 2004 is 13.4 billion British pounds [1 British pound = US$1.80] compared to the 15.1 billion pounds assumed when price limits were set in 1999. Comparable figures in dollars would be $24.13 billion compared to $27.19 billion.

Part of the reason for the difference is increased efficiency, meaning the companies have been able to carry out some of the work they needed to do more cheaply than Ofwat assumed.

But some of the environmental improvement work scheduled for this period hasn't yet been carried out. This leaves a considerable part of the improvement work to be completed by December next year.

The investment made by companies in their infrastructure has resulted in a report by the Drinking Water Inspectorate that drinking water quality has continued to improve, and from the Environment Agency which reports continued improvements to the water environment.

Ofwat's 'Early Start' initiative in December 2003 gave the companies the go-ahead to a further 1,000 projects estimated to cost almost 1 billion pounds. These will be carried out over the next two years and will help to reduce the dip in overall investment immediately following a price review that has been a characteristic of previous reviews.

The report shows that capital spending for 2003-04 is in line with projections at the last price limit of 3.7 billion pounds. Operating expenditure for the same period was 2.9 billion pounds, very slightly higher than was expected.

Keith Mason, director of regulatory finance at Ofwat, said: "We are pleased the companies are continuing to make efficiency savings and that investment in their infrastructure is paying off in the form of improved service to customers.

"But we and the Environment Agency are concerned about the amount of work still needed on the National Environment Programme. We have discussed this with each company and they are confident that the programme will be delivered."

The performance of the companies' assets overall, such as water mains, sewers and treatment works, is broadly the same as in previous years. But the performance of sewage treatment works is slightly worse.

On the financial side, companies' operating profits were higher in 2003-04 than the previous year, at 2 billion pounds, despite the combined effects of operating cost pressures and companies charging higher amounts for depreciation. But these have resulted in a slightly lower return on capital for the industry in 2003-04 than in 2002-03.

Other key financial data from the report:
* Industry debt at 31 March 2004 was 21 billion pounds, 1.6 billion pounds higher than last year. Average gearing is now 59%.
* After special dividends are removed, total dividends in 2003-04 of 1.2 billion pounds are 2.5% lower than in 2002-03.
* Companies spent 1.5 billion pounds more than their income in 2003-04.
* This year saw the first rights issue by a company to provide new equity for the water and sewerage industries. United Utilities raised 500 million pounds in September 2003 in the first part of a possible 1 billion pounds issue.
* Turnover increased by 1.7% above inflation in 2003-04, slightly lower than the 1.9% average price limit for the year.

NOTES:
1. The Director General of Water Services is the economic regulator of the water and sewerage companies in England and Wales. He exercises his powers in a way that he judges will allow them to carry out their functions properly, and finance them.

2. The information in the report is in 2003-04 prices. Information for earlier years has been adjusted to 2003-04 prices by reference to the Retail Price Index.

3. Wessex, Bristol, Mid Kent and Portsmouth paid special dividends in 2002-03 totaling 258 million pounds.

4. In December 2003, Ofwat gave the go-ahead on projects that were scheduled to be part of 2005-10 spending so that planning and contracting could begin immediately, rather than waiting for our final determinations in December 2004.

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