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Announcement:

Moody's: Political Pressure on UK Water Companies Sign of Challenging Economic Environment

08 Nov 2013

London, 08 November 2013 -- Moody's Investors Service has today said that it views the letter, sent by the UK government and asking water companies to consider forgoing allowed price increases in 2014/15, as further evidence of the difficult environment in which the sector now operates, with affordability of utility bills high on the political agenda.

Whilst the impact on companies of not increasing prices next year would be at most modest, the letter represents a heightened level of political attention to the sector. It adds to an already challenging backdrop for the review currently being carried out by the Water Services Regulation Authority, Ofwat, to set prices for companies for the five-year period from April 2015.

Moody's notes that the letter was addressed directly to companies' CEOs in relation to their approach to adjusting prices within permitted limits. In our view, this government initiative does not amount to interference with the independent economic regulation of the sector by Ofwat. However, if political pressure were to result in Ofwat departing from its established price setting methodologies and the outcome of the 2014 price review were politically driven, we would view this as a clear credit negative for the sector.

According to a press release, issued on 5 November 2013, by the Department for Environment, Food and Rural Affairs, Defra, the letter from Environment Secretary Owen Patterson calls on water companies to ensure that customers get a fair deal, stressing the "tough times" that households are facing. As part of "government's plan to help hardworking people", the press release says that water companies have been asked by Ofwat to consider if they need to apply the full price increases allowed for 2014/15 under the regulator's 2009 Price Review.

Under the 2009 Price Review, water companies are allowed to increase prices for 2014/15 by Retail Price Index (RPI) inflation for the year to November 2013 plus a factor 'K'. For the 10 water and sewerage companies (WaSCs), K averages 0.5% with a minimum of -1.1% for Severn Trent Water Limited (A3 stable) and a maximum of 1.6% for Yorkshire Water Services Limited (Baa1 stable). The factor is negative for four companies meaning that they would, in any even be required to reduce prices in real terms for the coming year. RPI inflation for September 2013 was 3.2%.

The loss of revenue and hence impact on companies of keeping prices flat in real, or even nominal, terms would be at most modest. Indeed, some companies refrained from applying the full allowed price increases for certain years in the current regulatory period, including Southern Water Services Limited (Baa2 negative), which for prices charged in 2013/14 included a K-factor of 2.1% instead of the 3.3% allowed by Ofwat, and Thames Water Utilities Limited (Baa1 stable), which reduced its K-factor in 2013/13 to 1.5% from 4.6%. Overall, we do not envisage any negative rating impact from companies reducing the amount they charge to customers, given the low average K-factor for the last year of the current period. Moreover, companies such as United Utilities Water Plc (A3, stable) and Severn Trent Water are currently well positioned in their rating categories. The rated companies with most to lose are three of the four high-leveraged WaSCs - Anglian Water Services Limited (Baa1 stable), Thames Water and Yorkshire Water with allowed K factors of 0.9%, 1.4% and 1.6% respectively. Southern Water, the fourth highly-leveraged WaSC, has a K factor of -0.1%.

The increasing pressure on water companies to reduce bill increases for customers will be felt mainly at the upcoming price review. Companies with large investment requirements, such as Thames Water, will be particularly challenged. The company is already facing pressure from the regulator, who is considering making a substantial favourable effects claim on the basis that the company disproportionately benefited from low funding costs and high inflation. Ofwat had also been reviewing Thames Water's application for an interim determination of K for the year 2014/15, which it declined formally on 8 November 2013.

Stefanie Voelz
Asst Vice President - Analyst
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Neil Griffiths-Lambeth
Senior Vice President
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's: Political Pressure on UK Water Companies Sign of Challenging Economic Environment
No Related Data.
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