Yorkshire Water says debt level is sustainable

The decline in market interest rates before May this year exposed the risks of funding decisions that some UK regulated utilities have made, according to a report by Moody’s.

Stefanie Voelz, a senior analyst at Moody’s, told the Yorkshire Post: “If companies have issued (debt) at a certain point in time with specific interest rates and since then interest rates have gone down then this means that on ‘fair value’ terms their leverage is higher than the book value, because in today’s terms they could refinance more cheaply than what they could have raised in the past.”

Foreign-owned Yorkshire Water, headed up by CEO Richard Flint, is one of the companies which has a higher embedded cost of debt, said Ms Voelz.

She said: “It has locked in relatively high interest rates over the longer term compared to current market rates.

“That means it might be relatively more exposed than other water companies to regulatory returns coming down.”

According to Moody’s, the value of Yorkshire Water’s debt is equivalent to 77 per cent of its total assets. The company’s reported ‘fair value’ leverage is 116 per cent.

A spokeswoman from Yorkshire Water said: “We believe that our level of debt is sustainable and that this is reflected in our credit rating.”

She added that the firm runs its finances “prudently and carefully”.

Utility companies could need to deleverage to maintain key financial metrics in line with their assigned rating if low real interest rates persist, according to the report by Moody’s.

“In such a scenario, creditworthiness within the sector will diverge, because allowed regulatory returns will converge with market rates at a faster rate than some companies’ embedded cost of debt,” said Scott Phillips, a co-author of the report by Moody’s.

Utility companies have come under fire in relation to the impact of bill rises on consumers.

However, Moody’s has raised concerns about government pressure on UK water companies to forgo allowed price increases in 2014/15.

Water companies were permitted by industry regulator Ofwat in a 2009 review to raise prices by an average of 0.5 percentage points above inflation in 2014 and 2015.

But Moody’s said: “If political pressure were to result in Ofwat departing from its established price setting methodologies and the outcome of the 2014 price review were politically driven, we would view this as a clear credit negative for the sector.”

Labour’s new Shadow Environment Secretary, Maria Eagle, told the Yorkshire Post last week that Britain needs a “new deal” with water firms that will force them to cut bills for those who cannot pay while closing loopholes which allow them to avoid paying tax on their huge profits.

Yorkshire Water came under heavy fire for its failure to pay any corporation tax last year despite posting profits of £186m, and handing out more than £250m in dividends to its shareholders – while hiking bills by 6.6 per cent.

The firm broke no rules – but Ms Eagle made clear she will be developing proposals to address the issue directly.

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