PR14 changes may hit water company credit ratings
Changes in the way that Ofwat sets water tariffs in England and Wales could be credit negative for water companies, a report from Moody's Investors Service has warned.
Tighter price controls imposed by the regulator in PR14 could weaken the financial covenants that protect creditors, making the companies less attractive proposition to lend to, the report said.
"Highly-leveraged financing structures in the UK water sector incorporate a range of creditor protections, including financial covenants that lock up cash if breached," says Stefanie Voelz, Moody's Senior Analyst and author of the report. "If these covenants are not adapted to the new regulatory revenue building blocks, they could overstate cash flows for debt interest service. As a result, the financial covenant package would be less effective and reduce the credit quality of affected UK water companies."
The affected companies include Anglian Water (rated Baa1 stable by Moody’s), Thames Water (Baa1 negative) and Yorkshire Water (Baa1 stable. The report predicted that these companies would seek to preserve the value of their financing structures, and hence their credit quality, by adding an additional covenant once the outcome of Ofwat’s final determinations - setting prices for the five years from April 2015 – is known.
Moody's also notes that following the regulatory changes, it may be difficult to estimate a company's performance from its statutory financial statements. Accordingly, investors would require additional information to assess company performance against regulatory targets.
Moody's report, entitled "UK Water Sector: Regulatory changes could weaken financial covenants for highly leveraged structures, a credit negative," is available at www.moodys.com.
- Welsh Water ordered to cut Tata Steel water tariff Welsh Water has been told that it needs to charge Tata Steel less for water at its Newport site following an 11 year... Read More >
- Thames Water faces draft penalty notice for licence obligation breaches Thames Water could be issued with a draft penalty notice by Ofwat for breaching its licence obligations concerning the... Read More >
- Ofwat chairman calls for reform of Thames Water Ofwat chairman Jonson Cox has set out a challenging five-point plan for reform of Thames Water, following criticism of the... Read More >
- Meeting AMP7 leakage targets Damian Crawford, head of smart networks & leakage at Stantec, discusses how becoming data-rich and knowledge-smart can... Read More >
- Rewarding excellence WWT content director Alec Peachey looks ahead to next year's Water Industry Awards. Read More >
- Delivering a smart network Tom Mills, senior director UK&I at Sensus, examines what a smart water network really means - and how to get there. Read More >
- A watershed moment for the water industry? Tessa Harding, director of water at Thomson Environmental Consultants, discusses the government's Environment Bill. Read More >
- AMP7: putting the customer centre stage 2020 marks the beginnings of a new chapter for clients and contractors in the water industry with the start of AMP7, the... Read More >