Water regulator Ofwat has raised concerns over the ability of Dwr Cymru (Welsh Water) to finance major investments it has planned while maintaining financial resilience. The assessment comes in the regulator’s latest annual monitoring financial report, which covers water companies in England and Wales for the year ending 31 March 2026.
Elevated concern category
Welsh Water has been moved into the elevated concern category for financial resilience, up from standard, due to concerns about its ability to secure finance efficiently over the medium and long term while delivering its investment programme. The company plans to spend £4bn in capital investment in the five years to March 2030 to address flooding, river water quality, pollution incidents and sewage discharges into rivers.
Unlike other water companies, Welsh Water has no external shareholders and is almost solely reliant on bond markets to fund capital investment projects set out in its latest five-year assessed management plan period (AMP8) 2025-30.
Financial challenges
The report states: “Net debt and financing costs continue to increase, whilst ongoing operational challenges, delivery of the wastewater enforcement undertakings, and a substantial investment programme present significant execution risks.”
It adds: “The company’s credit profile has weakened, with ratings falling from A minus in 2024 to Baa1 currently. Rating agencies have highlighted concerns regarding the limited flexibility of Dwr Cymru’s capital structure as it seeks to deliver an operational turnaround alongside significant investment and environmental obligations.”
“Continued ODI (outcome delivery incentives) under performance, together with environmental and customer service challenges, creates uncertainty around future financial performance and continues to weigh on external credit assessments.”
Regulator’s stance
Ofwat said: “Welsh Water is entering the most capital-intensive period in its history, with over £4bn of expenditure still to be delivered by 2030. Given its existing capital structure and increasing financing costs, there remains uncertainty over how this programme can be funded efficiently while maintaining financial resilience.”
“We therefore consider it is appropriate to move Dwr Cymru into elevated concern and increase our monitoring of the company.”
Three water companies, Thames, South East and Southern, sit in the more serious “action required” category. North Wales water and sewerage company Hafren Dyfrdwy has remained in the standard category with the regulator not having any specific concerns with its financial resilience.
Company response
A Dwr Cymru/Welsh Water spokesman said: “We recognise Ofwat’s decision to move Dwr Cymru to elevated concern in their recent monitoring financial resilience report.”
“We also recognise the pressures identified by Ofwat and the importance of delivering our investment programme alongside sustained improvements in operational and environmental performance. Our £4.2bn programme for 2025–30 is the largest in our history, with investment expected to increase in the second half of the period.”
“Our focus is on delivering that programme effectively and efficiently, maintaining a strong and resilient financial position, and achieving the improvements customers and the environment rightly expect.”
At the end of March this year the company had a regulated capital value of £8.4bn with regulatory gearing (borrowing) of 60.5%. As at 30 September it had £4.2bn of bonds outstanding and a further £900m in loans. The average maturity of its bonds is around 11 years.
It said that its regulatory gearing is amongst the lowest in the sector and below Ofwat’s 70% level, above which it considers gearing inconsistent with long-term financial resilience.
Rating agency Fitch has maintained a stable outlook for Welsh Water with its secured debt remaining at minus A. Fitch says in its latest report on the water company: “We forecast comfortable headroom in Dwr’s net debt/regulated asset value against our negative sensitivity of 70%, with net debt/RCV increasing to about 63% by end-AMP8 (2030).”
“The headroom is supported by the parent company, Glas Cymru Holdings Cyfyngedig, maintaining a non-dividend policy.”
On its investment commitments it adds: “Dwr has reprofiled its forecast capex (capital expenditure), with a significant back-loading towards end-AMP8. Back-loaded delivery may improve efficiency through greater design maturity or better-targeted expenditure, but it increases execution risk.”
“Failure to deliver the capex programme in full may result in funding clawbacks through the price control deliverables mechanism, where unspent allowances are returned to customers. In addition, lower investment in the network may worsen asset health and operational performance, resulting in higher ODI penalties and/or fines over the remainder of AMP8.”
“However, our current rating case foresees that the company will accelerate investments in the second half of the regulatory period, ultimately delivering the capex plan.”
Last year Ofwat ranked Welsh Water in the lowest category (lagging behind) in its water company performance report for 2024-25. The assessment was based on 12 measures where in seven, including leakage, supply interruptions, drinking water quality and treatment work compliance, it was marked as being poorer than performance commitment levels. This year’s report will be published shortly.
