14th Oct 2015 11:46
LONDON (Alliance News) - The National Audit Office Wednesday said UK water companies made a net gain of around GBP815.0 million from unexpected income between 2010 and 2015, mainly from lower-than-expected corporation tax and interest rates.
The news will be welcomed by investors in the companies. However it has also placed the industry under a spotlight, as questions are asked why the excess profit was retained by water companies rather than passed on to UK households.
"The headlines aren't favourable for the UK water companies and follows from the 2013 headlines that the sector hasn't paid 'enough' taxes over the years," said RBC Capital Market analyst Murice Choy.
The National Audit Office, which tracks the spending and accounts of all government departments, said water companies gained around GBP410.0 million from lower-than-expected corporation tax and GBP840.0 million from lower-than-expected interest rates over the five year period.
However, it said UK water companies also absorbed costs and provided water bill discounts in the period worth GBP435.0 million - meaning overall, water companies made GBP815.0 million in net windfall gains, or unexpected income, between 2010 and 2015.
In terms of London-listed water companies, there are FTSE 100-listed Severn Trent PLC and United Utilities PLC, alongside FTSE 250-listed Pennon Group PLC, which owns South West Water. SSE PLC also owns SSE Water.
"As a result of taking on the risks of changes in taxation and interest rates, reducing fluctuations in customer bills, companies have benefited. But they could have made a loss if interest and tax rates were higher than expected," said the NAO.
RBC analyst Choy said that although he believes Ofwat, the water regulator, will take the NAO's report into account when it decides the regulatory environment for the 2020 to 2025 period, he thinks Ofwat understands the unexpected gains could well have been unexpected losses.
"Ofwat recognises that had interest rates and taxes gone the other way and rose instead, the companies would have had to bear the extra cost and the NAO may have to write a different report," he said. "As well, Ofwat noted that following the Ofgem model for predicting interest rates (which uses caps as noted by NAO) would not necessarily lead to lower costs in the future."
The report also said the customer service offered by water companies has "improved markedly" since the industry was privatised back in 1989, including the quality of water being delivered to UK households. The UK has to date not had to pay fines for failing to comply with EU water directives, unlike other member states, it said.
Since privatisation, UK water companies have spent a combined GBP126.0 billion in capital investment which led to those improvements. To put that into perspective, water companies are only expected to spend a combined GBP44.0 billion between 2015 and 2020 on improving water quality.
However, customer bills have also risen "to pay for these improvements", the NAO said. The average UK household water bill, including sewerage services, rose to GBP396 per year between 2014 and 2015, up 40% from 1989. The NAO said most of that 40% rise occurred between 1990 and 1995, just after the sector went private.
In the year between 2014 to 2015, total water company revenue was GBP11.80 billion, based on that GBP396 per year household bill figure.
"Bills have stabilised since but still represent an important component of household spending. Bills represented around 2.3% of average household spending in 2013, rising to over 5% for the poorest households," said the NAO.
Support offered to financially distressed bill payers by water companies is expected to reach 1.8 million people by 2020.
Ofwat, the regulator of the water industry, expects bills to fall by 5% in real terms between now and 2020. Via its price review in 2014, Ofwat said overall bills between now and 2020 will GBP3.0 billion less than what water companies proposed during the review.
"Ofwat?s 2014 price review committed companies to improving services further over the next five years while cutting customer bills, increasing value for money for consumers. Customers, however, have not seen enough of the benefits of companies? unexpected financial gains from factors such as falls in corporation tax rates. Ofwat made significant improvements in 2014, but its price cap regime is not yet achieving the value for money that it should," said Amyas Morse, head of the NAO.
Water UK, which represents UK water companies, including all of the London-listed stocks, said it worked closely with the NAO whilst the report was being compiled
The trade body said the report "contains no real surprises", stressing that the unexpected gains arose from the difference between water company estimates and the actual figures used the NAO.
"The results could be expected to be similar if this process were applied to any company or industry," said Water UK in a statement.
Severn Trent shares were down 0.2% to 2,213.00 pence per share on Wednesday, whilst United Utilities shares were up 0.8% to 973.75p. Pennon shares were up 0.1% to 815.50p.
By Joshua Warner; [email protected]; @JoshAlliance
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Related Shares:
PennonSevern TrentUnited Utilities