After all the years of preparation, Ofwat’s final determinations for the 2014/15 periodic review were published this morning. Average domestic bills are due to fall by 1 per cent a year until 2019/20.
Despite Ofwat reducing its Weighted Average Cost of Capital (WACC) assumption from 3.85 per cent to 3.74 per cent – for the wholesale activities this equates to a cut from 3.70 per cent to 3.60 per cent – the market generally welcomed the news.
Shares in Severn Trent and United Utilities rose by c3 per cent in early trading, partly because the veil of uncertainty has now been lifted.
In the case of United Utilities, most of the yawning gap between its estimates and those of Ofwat for its sewerage-related totex has been closed. The five-year gap now is a comparatively modest £179 million, equivalent to £36 per year.
As such, with a reasonable dividend cover, United Utilities may be able to avoid a cut.
Severn Trent had some salient issues at the draft determination but most of these have now been resolved. Indeed, it seems to have met Ofwat’s sewerage cost assumptions with comparative ease.
However, even on Ofwat’s numbers, Severn Trent’s dividend cover is very low. No doubt, it will have scope for material out-performance but whether a dividend cut will be implemented remains to be seen – a decision is due next spring.
As a fast-tracker, Pennon was more advanced in its regulatory dealings with Ofwat; it is receiving an £11 million uplift to its Regulatory Capital Value (RCV) and is exempt from the impact of the lower WACC assumption.
Indeed, its share price now is more dependent upon either sector bid activity or on news about Viridor’s waste activities.
With net debt of c£9 billion and aspirations to raise its prices in real terms, Thames faces many challenges. However, its projected water costs are well below Ofwat’s assumptions. Furthermore, Ofwat has granted Thames various financial allowances relating to its Tideway Tunnel scheme.
As previously flagged, Ofwat has confirmed that Southern’s RCV is to be cut – by £55 million, due to shortcomings on the quality of its sewerage services.
The one obvious outlier is Bristol, whose cost base seems to differ very markedly from Ofwat’s assumptions – the five-year figures are £541 million and £409 million respectively.
Ofwat has emphasised the need for Bristol to seek out efficiencies or “shareholders will be exposed to additional costs”.
With regard to referrals to the Competition and Markets Authority, none of the quoted companies seems likely to pursue this route, especially since United Utilities has closed most of its sewerage totex gap with Ofwat.
Clearly, Bristol has material unfinished business with Ofwat that may warrant such a referral. Southern and, perhaps, Thames could join them.