Moody’s: PR19 presents more challenges than opportunities

Moody’s will maintain a negative rating outlook on UK water companies until the PR19 process is complete, the agency’s senior credit officer for infrastructure finance told a conference today.

Stefanie Voelz, who is also a vice-president at Moody’s, discussed the impact of the latest price review process on the sector’s rating prospects at a conference organised by Westminster Forum.

She said that PR19 presented “more challenges than opportunities for companies from a credit perspective”.

These include the squeeze on returns proposed by Ofwat, which will put pressure on those companies with relatively high debt costs, she said.

And overall, she concluded that Moody’s will maintain its existing negative outlook on the sector until the PR19 process has concluded next year and companies have had the opportunity to appeal to the Competition and Markets Authority (CMA) against their final determination.

She said: “We’re going to keep a negative outlook for a little while longer because the draft determination might not give sufficient clarity about where companies are going. We will probably want to see the final determination or wait for companies to decide whether they want to go to the CMA.”

Tony Smith, chief executive of the Consumer Council for Water, backed Ofwat’s decision to challenge companies “much harder” on efficiency than it has in the past.

“Returns have been nonsensical for a low risk industry,” he said.

But, the desire to minimise bills for today’s customers should not result in much needed future investment being squeezed, Smith said, adding: “It’s right that Ofwat should challenge that level of efficiency. We want to make sure it’s a genuine focus on efficiency and not cutting into the core of the service because we share the view that investing for now and the future is really important.

“Historically, companies viewed the price review process as a game where they have tried to maximise the returns they get for shareholders, which has undermined the credibility of the industry. We have to get to grips with that but we don’t want it at the expense of really important investment in the future.”

David Black, senior director, Water 2020 at Ofwat, warned companies not to “cut corners today” because there will be “penalties tomorrow”.

In particular, he said the regulator had been right to challenge those companies which have displayed “very little ambition” on cutting per capita consumption.

Read more from Black here.