‘A tough overall stance’

Ofwat, the UK water regulator, recently released its final determinations for the period 2010 to 2015. The final determinations set out service standards, investment plans and price limits for UK water companies, having taken into account business plans submitted by them.

Niall Mills is a senior asset manager, infrastructure at First State Investments in London, and a board member of Anglian Water Group. InfrastructureInvestor asked him for his thoughts on the implications for Anglian and the industry as a whole.     

II: How important are Ofwat’s final determinations to water businesses in the UK?

Mills: The final determinations on price limits are the single most important thing that happens in the UK water industry every five years, because they determine the size of the companies’ capital programmes, their maintenance expenditure and so on. For at least the last two years, every UK water company will have worked extremely hard to prepare the business plans they wanted the regulator to consider in order to get the outcome they wanted.  

How did Ofwat approach this year’s determinations?

The regulator clearly focused on keeping price increases to an absolute minimum, although it’s also fair to say that the performance of the businesses was also taken into consideration. Companies with a higher Operational Performance Assessment score, the key metric Ofwat uses, have had a more generous ruling than those with a lower score.   

Could the outcome have come as a surprise to any of the water companies?

We had an earlier draft in August, so no, it was reasonably clear where Ofwat would be going. Still, it’s a pretty tough overall stance they have taken, and to some companies the outcome must have come as a disappointment – some must have hoped for a more favourable view on them.  

What’s Anglian’s view on the ruling?

As I say, we think it’s a tough one, and it puts a high level of challenge on new investment, maintenance programmes and the possibility for new projects to be delivered, for example in the context of new housing. But we have done a lot of work in all the relevant areas already, and we are going to meet this challenge head on.    

Should investors in UK water assets consider the impact of the determinations on how they value these assets?

Yes. Clearly there is a valuation impact for all companies, but it is a matter for each company to review. The review has determined the cost of capital, capex and opex for the next five years and, as such, has a very significant and specific impact on the value of each company. 

What does this year’s ruling mean for the outlook of investing in UK water in general?

The outlook is still very much aligned with investors who are looking for steady, long-term returns.  Yes, investors should focus on the performance of individual companies, and their managements’ ability to deliver strong performance within the constraints that the regulator has set out. We think the 2009 determination will stretch the industry, to the effect that the better-performing businesses will begin to outperform the sector even more, and the not so well-performing ones will fall further behind. But for the sector as a whole, the long-term attractiveness definitely remains.