Moody’s affirms credit negative impact of Ofwat outperformance sharing decision

Following Ofwat’s publication two weeks ago of its decisions on adjusting its PR19 methodology to take on board changes fuelled by legitimacy criticisms, Moody’s has affirmed the position it adopted after Ofwat’s April consultation on the subject.

The ratings agency said the regulator’s decisions were in bulk in line with the Spring consultation, and hence that its credit negative assessment stood.

While Ofwat raised the gearing threshold at which outperformance sharing with customers must be applied from 65% to 70%, Moody’s said: “The overall impact is unchanged. Specifically, outperformance sharing relating to high gearing will reduce allowed returns and curb earnings for highly leveraged companies, a credit negative.”

It found some consolation in Ofwat’s indication that companies can propose their own sharing mechanisms, including the use of transition periods, arguing this could help highly geared companies manage the implementation of the outperformance sharing mechanism. “However, this will be subject to showing that a transition period is in the customer interest, which may be difficult.”