Investigation into Yorkshire Water in relation to inter-company loans with one of its associated businesses
| Date | 13 October 2022 |
Case summary
In May 2022 we opened an investigation in relation to two inter-company loans that Yorkshire Water has in place. The loans, totalling approximately £940m, are from Yorkshire Water, as the regulated water company (the lender), to an associated company within the same corporate group structure (the borrower). We were concerned as to whether the inter-company loans met requirements set out in Yorkshire Water’s licence in order to protect customers by ensuring the regulated company has adequate resources to carry out its activities as a statutory water company. These obligations included having appropriate consent from Ofwat for such loans and, ensuring the loan arrangements are on arm’s length terms (that is, to avoid the risks of cross-subsidy which would disadvantage its customers).
All water companies are required to ensure that they have adequate resources in place to carry out their regulated activities. A company’s financial resilience is key to its ability to do this, better enabling it to protect customers and the environment from the potentially adverse consequences of financial or other risks a company takes or is exposed to. Transparency about a company’s financial arrangements is key to ensuring that any potential risks are clearly understood and that customers can see and trust that companies are being run in their interest.
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.
During our investigation Yorkshire Water took steps to address our concerns about the inter-company loans. These include Yorkshire Water securing a structured plan for the repayment of the loans by the end of March 2027 (bringing equity back into the regulated business), and making a series of additional commitments to improve the company’s financial resilience and invest a further £100m at shareholders expense) to reduce storm overflow spills by 2025. As a result, in October 2022 we decided to close our investigation.
Summary of Ofwat’s decision to open the case
It is set out in a water company’s licence that it must not, without prior approval from Ofwat, make a loan to an associated company. In 2008 and 2009 Ofwat provided consent for two loans Yorkshire Water had made to associated companies within their corporate group. Since that time the corporate group that...
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