Are water investors right to be nervous?

"Well, they would say that, wouldn't they?" That might be the natural response to this week's Water UK survey identifying investors' jitters over regulatory risk and the PR14 process. While the findings of the survey, revealed exclusively in Utility Week, contain some salutary warnings for Ofwat and the government, there are few surprises. Investors were put off by the Section 13 debacle, they're worried about the haziness of the PR14 methodology, and they expect lower returns in future. So far, so as you'd expect.

The true picture may be even gloomier. The survey was carried out between mid-March and early May this year. Ofwat chief executive Regina Finn resigned on 14 May, no doubt sparking further investor concern that won’t be reflected in this survey. Moreover, the water sector has come under the spotlight of public scrutiny in the past few weeks, with Ofwat chair Jonson Cox publicly airing concerns over the use of shareholder loans, lack of transparency and lax corporate governance. This sparked a media furore that engulfed a luckless Thames Water, which published its results the day after Cox’s intervention put water at the top of the national news agenda. Investors already jittery in early May are likely to be having palpitations by now.

But let’s not get carried away. All these are localised concerns that affect the sector in the short to medium-term, while many if not most of its investors are in it for the long haul. Take a step back, look at other territories and classes, and UK water is still looking very attractive indeed. This was amply proven recently with the Severn Trent saga, which demonstrated that investors are still willing to pay over the odds for water companies – though in this case, the water company in question valued itself even higher.

One of the survey’s findings, however, might give company treasurers and the folks in Birmingham pause for thought. Most investors said water was “as risky” or “riskier” than energy transmission and distribution. Water companies are not seeking investment in isolation, and as one respondent to the survey pointed out, it’s not that investors particularly like regulated sectors; rather, they get excited at the prospect of monopolies. The introduction of limited competition to the water sector and other changes, such as a potential licence modification tightening up corporate governance, must be deftly handled or water risks losing out to other utilities.

Ellen Bennett

This article first appeared in Utility Week’s print edition of 21st June 2013.

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