Institutional investors in the regulated water sector have described the current 2014 Price Review by industry regulator Ofwat as worse than 2009, according to a new survey.
The comments come with the publication of the latest annual survey of investors in the water sector, conducted by Water UK, the organisation which represents the UK water companies at national and EU level, between mid-March and early May last year.
The aim of the survey was to obtain and report an up-to-date picture of the views of significant investors on the attractiveness of investing in the water sector in England and Wales, consisting of the following:
- Holders of equity in listed companies
- Holders of equity in unlisted companies
- Bond holders
- Providers of medium or long term bank debt
The survey also included the rating agencies and a number of equity and debt advisors.
PR14 process to date "worse than PR09 "
Commenting on economic regulation and Ofwat’s current Price Review, the largest proportion of all investor types said the PR14 process to date was worse than the PR09 process had been. The majority of listed equity holders (80%) said that the methodology consultation had made the sector less attractive. The majority of investors (90% of listed equity holders, 94% of unlisted equity holders, 57% of banks and 53% of bondholders) also said that the recent process whereby Ofwat had proposed license modifications had made the sector less attractive.
The most frequently mentioned objectives of investment in the water sector were stability and reliability (68% of holders of unlisted equity and 53% of bond holders); and the long term nature of the investment (52% of listed equity holders).
The survey also asked about the effect on the attractiveness of the water sector of changes in the global economy and in the global market for infrastructure finance. Respondents were evenly balanced between saying on the one hand that these changes had made the sector more attractive and on the other hand that they had made no difference to its attractiveness.
The majority of investors who expressed a view said that the UK water sector was either as attractive as or more attractive than comparable utilities in North Western Europe, Australia, Canada and the USA and that it was more attractive than comparators in Eastern and Southern Europe.
The majority of investors rated water as being “as risky” or “riskier” than electricity and gas transmission and electricity generation. Since 2008 there has been a shift away from “water less risky” to “water more risky” or “water as risky” relative to energy infrastructure and a shift in the other direction relative to telecoms and airports.
Pre-eminent risk for all types of investor is regulatory risk
The pre-eminent risk for all types of investor was regulatory risk, with inflation risk was most frequently cited as the second biggest risk by listed equity holders, banks and bondholders. While management risk was seen as being unchanged, 100% of shareholders and banks and 84% of bondholders said that regulatory risk had increased since 2009.
On the Government’s water policy proposals, investors were approximately evenly divided between saying “the Government’s water policy proposals had made no difference to the attractiveness of the sector” and “the proposals had made the sector less attractive”. 11% of holders of listed shares said that the Government’s proposals had made the sector more attractive
With regard to how Ofwat’s proposals for remunerating risk and ensuring financeability would affect the attractiveness of the sector, the most frequent response of holders of listed shares was that the proposals had made no difference (44%). However, the majority of holders of unlisted shares said the proposals had made the sector less attractive (66%).
When asked about their expectations for PR14 and what the most significant outcomes would be, the most frequent responses were: lower returns on investment (25% of investors); reasonable returns, continued confidence and stability (21%); and more divergence in the returns of the companies (16%).
The survey was overseen by a steering group which included representatives of Ofwat, the Consumer Council for Water, Water UK and some of the water and sewerage companies (WaSCs) and water only companies (WoCs).
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