Notional company ratios. & financial resilience

Transcription

1 Notional company ratios & financial resilience 1

2 Context Since privatisation the water sector has maintained strong investment grade credit rating; this has benefitted customers as the lower cost of financing and any related efficiencies are passed on to the customers. During PR04 price review Ofwat tested financeability based on a set of financial indicators ( key financial indicators ). This reflected A-/A3 credit ratings for the notional company. Over subsequent price controls notional ratios assumed in the financeability tests have weakened (see slides). With macroeconomic risks on the horizon, it is in the customer interest that sector retains its credit quality, and that PR19 delivers a financially resilient determination to the sector. 2

3 Notional Financeability some history PR04 PR09 PR14 Key Financial Indicators Source: Ofwat PR04 Final Determination, page 233 PR04 business planning process Standard package of ratios introduced (Ofwat letter MD190) Among others ratios this included PMICR at around 1.6x and FFO:debt greater than 13%. This followed a paper jointly published by Ofwat & Ofgem that set out regulatory views on financeability. 3

4 PR09 similar package of ratios as PR04 PR04 PR09 PR14 Key Financial Indicators PR04 greater than 13% PR09 about 13% ; PR14 c10% (see next page) Source: Ofwat PR09 Final Determination, page 233 PR09 Final Determination Capital investment during PR09 is higher than any price control since privatisation* Notional company is assumed to carry 30% RPI linked debt - Despite that financeability ratios achieved are tighter than at previous price control (PR04) Ofwat FD We have targeted financial ratios under our notional structure that are consistent with an A-/A3 credit rating. Most companies are in this position. * Source - Ofwat paper Financeability & financing the asset base 4

5 PR14 FD Key industry notional ratios PR04 PR09 PR Industry average PMICR (Including PAYG support) = 1.6x 14.00% 13.00% 12.00% 11.00% 10.00% 9.00% Industry average FFO:net debt = 10% FFO % 7.00% 6.00% 5.00% % PR14 determination Our analysis considers PMICR and FFO ratios in the FD. Industry average PMICR is > 1.6x with PAYG. Moody s credit rating agency disregard the use of PAYG (see slide 6). Industry average FFO:debt now averages 10% for the industry. - Target level for FFO:debt at PR04 was >13% 5

6 PR14 FD Ratios vs PR04 ratio test levels PR04 PR09 PR PR04 FD ratios level PR14 FD PMICR Estimated PR14 FD target >1.4x excluding PAYG support 14.00% 13.00% 12.00% 11.00% 10.00% 9.00% PR14 FFO/net debt PR04 FD ratios level greater than 13% PR14 industry avg level % % 6.00% 5.00% % Comparison of PR14 FD ratio against PR04 test levels - Industry average FFO:net debt has fallen to c10%. At PR04, Ofwat test level for each company was FFO:net debt greater than 13% - Headroom on the notional ratios have weakened across the board since PR04 If notional company existed, its credit metrics would have deteriorated from PR04 to PR14 6

7 Investment needs and industry s focus on negative real customer bills 7

8 Investment in water sector is at an all time high Ofwat Investment in the water sector has continued to rise More is needed to manage resilience in the face of pressures from growth and climate change. PR14 saw some of the highest investments in the water sector. Trends in capital maintenance (England & Wales) 8

9 PR14 FD bills have continued to fall 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -5.0% -8.0% -10.0% -9.0% -12.0% Despite the larger size of the asset base driven by significant investment, customer bills have continued to fall mainly driven by market interest rates and lower WACC However companies have gone further by lowering RCV run-offs rates (see next slide) 9

10 Industry s race to the bottom (RCV run-off rates) Companies across the sector have chosen lower run-offs to solve customer bills 7.5% 6.5% Depreciation/Run-off as percentage of RCV Industry average as Ofwat asked companies for flat bills 5.8% 5.5% 4.5% 4.50% 3.5% 2.5% 1.5% PR09 Run-off rates (RCV depreciation): Analysis show that the average RCV run-off rate has fallen across the industry. RCV Run-off rates are now at historic lows (4.5% of RCV) Some of this reduction in revenues is made-up by higher PAYG ratio. However, credit rating agencies are not supportive of PAYG as a method of solving ratios For all these reasons, credit metrics are now weaker than ever before. PR14 10

11 Conclusion and next Steps With the cost of financing representing a significant proportion of customers bills, it is in customers interest that the sector retains its high levels of credit quality enabling companies to access the cheapest cost of debt. With high powered ODIs, other regulatory reforms and the macroeconomic situation all creating additional perceived risk, stakeholders should refocus on financeability, and consider what levels of headroom are appropriate to retain credit quality of the sector. It is for all stakeholders benefit that PR19 delivers a financially resilient determination that reflects strong credit ratios and enables the investment needed to address the challenges of population growth and climate change. Contacts: Gagan Gulati Head of Financial Strategy & Regulatory Finance ggulati2@anglianwater.co.uk Alex Plant Director of Regulation aplant2@anglianwater.co.uk 11