(Alliance News) - The UK water regulator's upcoming determinations could lead to the biggest deterioration in industry credit quality since privatisation in the late 1980s, Moody's Investors Service said Tuesday.
Ofwat will release its final findings on Monday next week, and Moody's expects the largest-ever cut in allowed returns. It also sees the regulator allowing for less investment than water companies have said is needed.
Some utilities, Moody's believes, are likely to appeal Ofwat's determination. UK-listed water firms include United Utilities Group PLC, Severn Trent PLC, and Pennon Group PLC, and any appeals could drag the process into late 2020.
"Ofwat is likely to cut allowed cash returns by around a third, the largest reduction ever, and to set operational performance and cost targets that mean most companies face unfunded investment needs or significant operational penalties if they cannot sharply improve performance," said Moody's.
"Moody's estimates the regulator's draft determinations would have given companies GBP1.8 billion less than they said they needed to fund ongoing costs, and meant companies would incur a further GBP1.4 billion of operational penalties if they could not outperform their business plans. Gaps are likely to remain significant in the final determinations."
Even if water companies were to appeal, Moody's said, water bill and company cash flow reductions would still take effect from April 2020.
"Water companies will try to reduce or defer expenditure and focus their efforts on avoiding operational penalties, but lower cash flow will make further deleveraging difficult without equity injections. Companies may also turn to derivatives to avoid distribution lock-ups in the period, weakening the position of senior creditors," added Moody's.
By George Collard; georgecollard@alliancenews.com
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Pennon (PNN)
Severn Trent (SVT)
United Utilities (UU.)