Moody’s has confirmed its January 2016 position on Water 2020: that the package is credit negative for the water sector.
In a note published yesterday, the ratings agency said Ofwat’s proposals remain broadly in line with its December 2015 position, and hence that its own January view holds firm. The note said: “We continue to view the overall developments as credit negative for the sector, as opening up parts of the value chain to competition will increase the risk of cash flow volatility compared with a currently fully regulated monopoly with stable and predictable cash flows.”
Moody’s highlighted that a water resources market and separate price control carried the risk of asset stranding for post 2020 investments. On sludge it pointed out companies would be exposed to volume risk from PR19 and that the precise amount of RCV to be removed from monopoly actives remains to be determined.
The ratings agency added that different water companies would take different levels of hit. The note confirmed: “Individual exposure varies. Reforms relating to sludge activities, for example, will only affect the larger water and wastewater companies, while the smaller water-only companies are more exposed to the move towards CPI indexation. Highly leveraged companies remain most at risk, given their lower financial flexibility.”