Researcher perspective with Tim Whittaker, Director of the EDHEC Infrastructure & Private Assets Research Institute

Predictable regulated revenues do not necessarily translate into a resilient investment. For institutional investors assessing water companies, the distinction between adequate returns and the capacity to withstand financial pressure is central.

In our recent publication, “Generous When It Mattered: Regulated Returns and Financial Resilience in English and Welsh Water”, Tim Whittaker examines why companies facing the same inflation shock experienced different outcomes. His findings highlight the importance of how assets are financed, the equity remaining within regulated businesses and the capacity to restore capital when needed.

In this researcher perspective, we put five questions to Tim Whittaker, exploring what dividend figures and gearing ratios can miss, what the experiences of Thames, Anglian and Dŵr Cymru reveal, and why announcements of financial support require closer examination.

Figure 1. AI-generated illustration of water infrastructure.

• Your findings challenge persistent under-remuneration as an explanation for water-company distress. What should institutional investors take from that?

Institutional investors need to distinguish between the adequacy of regulated returns and the financial resilience of the companies receiving them.

The paper shows that during PR09 and PR14, Ofwat’s allowed returns exceeded what investors required by approximately 0.9 and 2.5 percentage points respectively. These were also periods when some companies increased leverage and developed financial structures that subsequently proved vulnerable.

The lesson is that predictable regulated revenues do not necessarily translate into a resilient investment. Investors need to examine how assets are financed, how much equity remains in the business and whether the capital structure can withstand adverse conditions.

• What do dividend figures miss about the movement of cash and the risks remaining inside regulated water companies?

One of our more surprising findings is that dividend payments do not predict which companies subsequently experienced financial distress. Anglian paid substantially higher dividends relative to its regulatory asset base than Thames, yet Thames encountered much greater financial difficulties.

Dividends also miss the substantial amounts transferred through upstream loans. We identified loans peaking at £2.3 billion at Thames and £1.6 billion at Anglian. These transactions moved liquidity outside the regulated companies while leaving financial receivables on their balance sheets.

At Thames, approximately £1.25 billion of outstanding loan principal was ultimately impaired. Investors therefore need to examine not just distributions, but where cash has gone and whether the assets remaining inside the regulated company are recoverable.

• When a gearing ratio improves while debt rises, what should investors examine to assess financial resilience?

An improving gearing ratio does not necessarily mean a company has become more financially resilient. Regulatory gearing measures debt relative to regulatory capital value, which can increase through inflation and investment even as absolute debt continues to rise.

Investors should examine the actual debt outstanding, its financing costs, maturity profile and exposure to inflation. They also need to understand debt elsewhere in the corporate group that may depend on cash flows from the regulated business.

Most importantly, they should consider the quality of the remaining equity buffer. A company may report substantial regulatory equity while holding intra-group receivables that cannot readily be converted into cash. Financial resilience depends on the resources genuinely available to absorb losses, not simply the reported gearing ratio.

Figure 2.  AI-generated illustration of water infrastructure.

• What do the contrasting experiences of Thames, Anglian and Dŵr Cymru reveal about the protection equity buffers and shareholder support provide?

Thames and Anglian entered the 2021 inflation shock with almost identical gearing of 83% and similar exposure to index-linked debt. However, Anglian subsequently received £1.165 billion of additional share capital in its regulated company, while further conditional shareholder support for Thames was not delivered.

Dŵr Cymru provides another useful comparison. Despite having greater index-linked debt exposure than either company, it maintained a substantially larger equity buffer of approximately 40% of regulatory capital value and avoided comparable financial distress.

These cases demonstrate that resilience depends not just on leverage or inflation exposure, but on the equity available to absorb shocks and the capacity of owners to restore capital when necessary.

• When a water company announces financial support, how can investors distinguish new equity from repayments or debt raised elsewhere in the group?

Sadly, this is complex, particularly for water companies that have undertaken whole-business securitisations (WBS). Investors need to trace where the money originated and how it moved through the corporate structure. Not every transaction described as financial support represents new external equity.

At Anglian, £1.165 billion of additional share capital strengthened the regulated company, but the transaction was partly financed through additional borrowing elsewhere in the group. At Thames, £500 million of support in 2023 was the repayment of an existing intra-group receivable, funded through convertible loan notes at the holding-company level.

Both improved the regulated company’s financial position, but they had different implications for group leverage and resilience. Investors should distinguish genuinely new shareholder capital from debt-funded injections, conversions of existing claims and repayments of money already owed to the business.

“Financial resilience depends on the resources genuinely available to absorb losses, not simply the reported gearing ratio.”

— Tim Whittaker
Director of the EDHEC Infrastructure & Private Assets Research Institute

Assessing the capacity to withstand pressure

Whittaker’s findings draw a distinction between the returns regulation allows and the financial resilience companies build. Adequate returns alone do not ensure that sufficient capital remains available when conditions deteriorate.

For institutional investors, assessing resilience means looking beyond reported gearing, dividend totals and announcements of support to understand the financing structures behind them. The experiences of Thames, Anglian and Dŵr Cymru highlight three considerations: the equity available to absorb losses, the recoverability of financial claims and the capacity to replenish capital. Together, these help explain a company’s ability to withstand financial pressure.

📄Read EIPA’s full research.
Generous When it Mattered: Regulated Returns and Financial Resilience in English and Welsh Water