Fitch: Ofwat has moved positively on PR19 but pressures remain

A senior director at ratings agency, Fitch, has said Ofwat’s final determinations (FD) are an example of the regulator listening to the sector.

Maria Fassakhova told Utility Week that while Ofwat had “moved positively” in its FDs on water company business plans for the next five years, the businesses remained under significant pressure.

However, she predicted that few would take the risk of an appeal to the Competition & Markets Authority (CMA).

Following the FD, Fitch has downgraded Anglian and Thames to Rating Watch Negative. All the other water companies Fitch monitors, with the exception of United Utilities, have kept their negative outlooks.

Fassakhova said that while the general election result and the FD had given investors a more positive outlook on the UK water sector, concerns remained.

She said: “At the draft determination (DD) stage I think there were a few moments of waking up in a cold sweat worrying about whether the FD would be worse. There were investors who were expecting things to get worse.

“At that point, we said if FD was the same as DD – with the same extent of financial penalties and a huge totex gap – then most of the sector would likely have been downgraded.

“What we have seen now is that Ofwat has moved positively. It has listened.

“The companies maybe they didn’t get everything they asked for, but the balance of risk and return has shifted favourably. That shift is perhaps more significant than a reduction of the weighted average cost of capital (WACC).”

Fassakhova said investors would now be on the lookout for potential referrals to the CMA.

She said: “For the majority of the companies this is probably an acceptable settlement. Companies don’t want to appeal because it takes a lot of managerial resources and time and makes it even harder to deliver on their business plans. I could maybe see one of two doing that – probably in the cases where there are still significant unresolved issues.”