In its sector comment on UK water companies published today, Moody's Investors Service says that water industry regulator Ofwat’s decision to pre-qualify two companies, Affinity Water Limited (Baa1 stable) and South West Water Limited (not rated), for a fast-tracked price determination will be credit positive for Affinity Water.
If Affinity Water accepts Ofwat's return guidance and is fast-tracked, it will receive an early draft determination, allowing management to refocus on running its business and implementing its investment plan for the next regulatory period, a clear credit positive. The company will also earn an initial financial reward, amounting to around 0.4% of its average regulatory capital value (RCV) over the next regulatory period; and enhanced incentives for future out-performance compared with companies that will not be fast-tracked.
All other UK water companies will have to re-submit their plans together with further evidence that their plans are in customers' best interest.
The companies will remain subject to additional regulatory scrutiny, and will not receive the financial reward nor the higher incentive payments that the fast-tracked companies will receive. They could, however, achieve a draft determination in June 2014 rather than August 2014, providing some procedural benefit.
Ofwat will require the non-pre-qualified companies to further explain their investment choices or cost assumptions. If the companies are able to provide the evidence that their plans reflect customers' best interests, Ofwat may not require significant changes to plans, which would be a credit positive given that regulatory targets close to companies' own proposals will make it easier for them to implement their plans.
Moody’s said it would be able to assess the ultimate impact of the regulatory review at the earliest at draft determination stage, when there is further clarity on Ofwat's baseline total expenditure levels, and companies' business plan proposals in comparison with these.
Moody's currently rates nine out of ten water and sewerage companies in England Wales, as well as five out of eight water-only companies (WoCs).
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