UK publishes 2004-05 financial performance, expenditure report for water industry

The UK Office of Water (Ofwat) report, 'Financial performance and expenditure of the water companies in England and Wales 2004-05', shows that water companies achieved the great majority of the outputs expected of them when Ofwat set price limits in 1999...

Sep 9th, 2005

LONDON, Sept. 7, 2005 (GNN) -- A report published today shows water companies have performed better than the regulator's expectations over the five years since 1999, according to an Office of Water Services (Ofwat) release issued by the Government News Network.

The Ofwat report, 'Financial performance and expenditure of the water companies in England and Wales 2004-05', shows that water companies achieved the great majority of the outputs expected of them when Ofwat set price limits in 1999. They did this through gross capital investment from 2000 to 2005 of 17.7 billion British pounds, compared to the 19.4 billion pounds that Ofwat assumed for the period.

A large part of the difference for capital expenditure is explained by increased efficiency (particularly on the sewerage service), where the companies have been able to carry out some of the work they needed to do at less cost than Ofwat assumed. Changes to the scope and delays in work also meant the companies did not spend as much as the regulator anticipated five years ago.

Operating expenditure on water services over the same period was 8.1 billion pounds, 280 million pounds less than assumed in price limits; and on sewerage services was 6.3 billion pounds, 25 million pounds more than assumed.

Most savings on operating expenditure were made in the early years of the period. But rising costs have driven up spending in some areas in the last two years. And some companies are using operational rather than capital solutions to meet some new requirements.

Customers are now seeing the benefits of the large improvement program during 2000-05. The Drinking Water Inspectorate has reported that drinking water quality has continued to improve, and the Environment Agency reports continued improvements to the water environment, largely as a consequence of the investment made by companies.

The performance of the companies' assets, such as water mains, sewers and water treatment works, broadly met Ofwat's expectations. But the performance of sewage treatment works in 2004-05 continued to cause concern. In the 2004 price review, the regulator set prices to enable efficient companies to improve the performance of their assets in line with its expectations within the period from 2005-10 and to maintain that level throughout the period.

Keith Mason, director of Regulatory Finance at Ofwat, said: "Over the last five years the industry has spent less than we expected. Despite claims by the companies that the 1999 review was too severe, they have largely been able to deliver all that was expected of them and perform well financially.

"We are confident that the companies will continue to respond well to our incentive-based system of regulation in which they benefit from efficiency savings in the short term before passing the benefits back to customers."

Key financial data for 2004-05:
* Turnover increased by 2.5%, slightly lower than the 3.4% average price limit for the year.
* Operating profits have increased by 82 million pounds to 2.1 billion pounds. But the return on capital remained at 5.9% for the year, unchanged from 2003-04. This reflects the continued investment in the asset bases of the companies.
* Average gearing (net debt : regulatory capital value) now stands at 61%. This reflects a 4.8% increase in debt finance to 22.5 billion pounds at March 31, 2005.
* Total dividends of 1.2 billion pounds were 2.3% higher than in 2003-04.

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. His duties include protecting the interests of customers, wherever appropriate, by promoting effective competition.

The information in the report is in 2004-05 prices. Data for earlier years has been adjusted to 2004-05 prices by reference to the Retail Price Index. To learn more, visit www.ofwat.gov.uk.

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