Moody's ratings agency has changed its outlook on Bristol Water's Baa1 rating to negative from stable.
"The change in outlook reflects the risk that Bristol Water's financial profile will weaken significantly following the very challenging final price determination for the next five-year regulatory period, which was published in December 2014", said Matthew Huxham, a Moody's Assistant Vice President -- Analyst and lead analyst for Bristol Water.
"While the outcome of the expected CMA review is uncertain, there are precedents, most notably the redetermination of the company's previous price determination in 2010, which suggest that Bristol Water could receive a more favourable settlement."
The change in outlook follows Bristol Water's announcement on 5 February 2015 that it would not accept the price determination for the upcoming AMP6 five-year regulatory period 2015-20 published in December 2014 by Ofwat. The water industry regulator will now refer the matter to the Competition and Markets Authority (CMA). Moody's understands that, once formally instructed, the CMA review process will take around six months.
The final determination as published by Ofwat set a weighted average cost of capital of 3.74% (real, post-tax) at the appointee level, compared with Bristol Water's allowed return of 4.3% in the current regulatory period. The regulator has not allowed it a company-specific or "small company" premium as it has done in previous periods, despite identifying that the smaller water-only companies generally have a higher embedded cost of debt.
The determination also includes a material reduction in revenues, with bills set to fall over AMP6 by over 20% in real terms, making Bristol Water an outlier compared to the industry as a whole, which will see an average real price decrease of around 5%.
This is partly the result of the fall in allowed return, and partly the result of an allowance for total expenditure of £409 million (in 2012/13 prices), which is almost 30% less than the £523 million Bristol Water had requested in its business plan submission.
Moody’s said the outlook is negative, reflecting the very challenging price determination from Ofwat, and the fact that unless the CMA price redetermination is significantly more favourable, Bristol Water's financial metrics will weaken in AMP6 and the company will likely fail to maintain a financial profile in line with Moody's guidance for the Baa1 rating.
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