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A senior investment manager has said that Ofwat’s bid to lower the weighted average cost of capital (Wacc) will not undermine the sector’s attractiveness to investment.
Addressing delegates at Water UK’s annual city conference today, Hans Peter Portner, senior investment manager at Pictet Asset Management, said that Ofwat’s proposed Wacc of 3.85 per cent, down from 5.1 per cent in the current cycle, will not limit investment attractiveness because it will de-risk assets.
“Reducing Wacc is a welcome development in PR14 for the right reason because it requires significant de-risking of the sector, which goes hand in hand with stable growth. It also incentivises companies to outperform which is a good signal,” he said.
However, ratings agency Moody’s last month downgraded Thames and Anglian while Yorkshire Water was downgraded by Fitch Ratings due to concerns that returns could be significantly lower given the low cost of capital.
As part of PR14, the regulator will ‘pre-qualify’ companies on Monday that have outstanding business plans which pass its tests for outcomes, costs and affordability, and which have demonstrated robust board assurance.
Companies that ‘pre-qualify’ can then choose to adopt Ofwat’s risk and reward guidance which will enable them to benefit from a fast-track approval process.
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