Tough price controls threaten utilities’ credit ratings



Plans by Ofwat and Ofgem to cut the baseline returns of regulated utilities in imminent price controls create a significant threat to their credit ratings, which could fall to below investment grade, Moody’s warned in a recent report.


Moody’s says the regulators’ approach to financing has become tougher and they seem to accept to lower ratings as “the price to pay for ensuring lower customer bills and greater legitimacy.”


“The regulators have a statutory duty to ensure efficient companies can finance their functions, but that does not mean that allowed returns will continue to support strong investment-grade ratings”, it explains.


“Regulators have now largely put the onus on companies to address pressure on credit metrics, and highly leveraged companies with expensive long-dated debt may struggle to do so.”


The report notes that although regulators give companies freedoms to decide how to structure their finances in terms of the balance between debt and equity, the cost of diverging from their notional ideal of an efficiently financed company has increased sharply.


“Regulators therefore appear to be willing to accept ratings for actual companies that are less resilient to variations in actual financing costs and operational performance than in the past,” it adds.


The report notes that few regulated utilities adhere to this ideal, with many having much higher levels of debt as a proportion of their regulatory asset value.


Moody’s warns pressure is greatest in the water industry, where they have assessed 80% of companies to be at an increased risk of a downgrade. The agency believes there is a “clear risk” that the sector average could fall from Baa1 to Baa2.


https://utilityweek.co.uk/tough-price-controls-threaten-utilities-credit-ratings/

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