9th Oct 2019 10:46
(Alliance News) - Moody's Investor Service said Wednesday that UK utility firms will see a fall in revenue, and therefore weaker credit metrics, as regulators seek to limit water and energy bills.
The credit ratings agency said regulators "increasingly narrow interpretation" of how a utility company can finance its operations means the firms' credit metrics "may no longer support strong investment grade ratings".
This could affect such London-listed water works as Severn Trent PLC, United Utilities Group PLC, Pennon Group PLC and electricity suppliers like British Gas-owner Centrica PLC and SSE PLC.
"UK regulators appear willing to accept weaker ratings on the basis of actual company performance as the price to pay for ensuring lower customer bills and greater public legitimacy," said Stefanie Voelz, a Moody's vice president & senior credit officer. "Highly leveraged companies with expensive long-dated debt or weak operational performance are most exposed to lower allowed returns."
In July, Ofwat - the UK's water regulator - said it is targeting a GBP50 drop in annual water bills, as well as a further GBP12 billion of investment into the water network.
At the unveiling of its 2019 price review, which included a "major" package of investment, Ofwat said water companies should invest GBP6 million a day over the next five years, which will help cut bills for customers by around GBP50 a year.
The following month the UK energy regulator, Ofgem, decided it wants to lower energy price caps for 15 million customers due to a fall in wholesale energy costs.
From the start of October, the Office of Gas & Electricity Markets will apply a default tariff price cap of GBP1,179 per year from GBP1,254 previously. For prepayment customers, the cap will fall to GBP1,217 from GBP1,242 previously.
The Competition & Markets Authority agreed to bring the methodology for adjusting the price cap for prepayment customers in line with those on default tariffs.
The regulator made the move after wholesale energy prices fell "significantly" between February and June. This followed a mixture of low customer demand and strong gas supply and storage levels.
Moody's said the covenants for utility companies is currently credit positive but noted the "devil is in the detail".
"Although restrictions included in covenanted financing structures enhance the credit quality of operating companies, regulatory changes and financial structuring by some companies have reduced their effectiveness," Moody's added.
The credit rater continued: "As a consequence, rating downgrades may trigger lock-up provisions in credit agreements or licences before financial ratio breaches bite. Where covenants or rating triggers do result in trapping cash at operating companies, Moody's sees increasing risk that they could cut off the distributions needed to service debt at rated holding companies."
Moody's noted these regulatory price reviews are still not finalised and although the current proposals "point towards increasing risk", things could improve for utility firms for a number of reasons.
These include appealing to the CMA if the firms don't like the final decision and also noted management and shareholders may be able to "take additional measures to protect credit quality".
By Paul McGowan; [email protected]
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