Credit ratings agency Moody’s is warning that measures in the Water Act 2014 which provide a basis for increased competition are a credit negative for the English water and sewerage companies.
Overall, Moody’s believes that – over the medium to long term – measures within the act, specifically those to expand competition will increase the business risk profile for the water and sewerage companies in England.
The ratings agency has previously commented that the introduction of retail competition of itself does not materially affect the sector’s credit quality, given the relatively small scale of the activities.
However, the introduction of competition in other parts of the value chain, including in relation to water supply and treatment, will increase the business risk in the sector, although Moody’s says the consequences are unlikely to materialise before 2019.
Moody’s views the introduction of an exit option from the non-household retail market for the water and sewerage companies as a positive development as companies that exit the competitive retail market will be able to concentrate on the core regulated activities. However, it says that the credit profile of any company that chooses to exit retail will, however, be no better than it is today as a vertically integrated monopoly supplier.
Changes will ultimately create a two-tier structure
According to Moody’s, the changes implemented by the act will ultimately create a two-tier structure for companies operating in England and Wales, with companies operating in England likely to be subject to a more competitive and challenging environment at an earlier stage. This means that the two water companies mainly operating in Wales, namely Dwr Cymru Cyfyngedig (Welsh Water, rated A3, stable) and Dee Valley Water Plc (not rated), are likely to face less risk of adverse business developments than their peers in England.
The ratings agency also said the while the Act introduces changes to the existing merger regime for water companies, it remains to be seen whether such changes will facilitate future mergers.
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