Ofwat pressure could deter shareholders

Water companies could find it difficult to attract investment after Ofwat’s guidance suggested a “significant” reduction in allowed returns, according to Moody’s.

In a report on the sector published Thursday, the ratings agency said: “Shareholders may not wish to write a large cheque if they are unlikely to receive a good return in future.”

This, it said was in response to recent guidance published by Ofwat, suggesting the return companies will be allowed to earn on their assets will to fall to 3.85 per cent , exposing highly leveraged companies.

While Moody’s says there is a general willingness from investors to support the sector, shareholders may shy away if returns in the future look small.

Those particularly at risk are Anglian Water, Thames Water, Yorkshire Water and Southern Water.

Moody’s analyst Stefanie Voelz told Utility Week these companies are likely to adjust their dividends policies, with shareholders likely to lose out.

“There are some levers to pull for companies to make sure they will be able to meet the new guidance from Ofwat,” said Veolz.

“Companies can adjust certain things to their business plans; they can also adjust their dividend policies.”

Despite this, some companies, such as United Utilities will not suffer to the same extent from lower returns as they have lower gearing.

In addition, other companies, including Severn Trent are also entering  the price review with ”financial headroom”, but are still likely to have to adjust their dividend policy to maintain credit quality, according to the agency.

Moody’s also said that incentives provided by Ofwat to increase potential returns are likely to have little impact on water companies.

According to the agency, additional income generated by the introduction of competition into the non-domestic market will be negligible.

Further, it says details are so far lacking in the price review on risk and reward based incentives.