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Finance & Investment This week Water regulation will be 'credit negative' Domestic competition mooted by the Treasury could deter foreign investment in the sector The pressures facing water com- panies' finances were highlighted last week, with analysts predict- ing regulatory developments will be credit negative for the sector, and that domestic competition mooted by the Treasury could deter foreign investment. A report by analysts at ratings agency Moody's said Ofwat's proposed changes in its approach to PR19 – Water 2020 – would decrease the stability and predictability of cashflows for the water and water and sewerage companies (Wascs) over the medium to long term, which will be "credit negative". However, companies' individual exposure varies, analysts said, with only Wascs being affected by reforms relating to sludge treatment and disposal. In a separate report, Moody's analysts suggested the transition from the retail price index (RPI) to the consumer price index (CPI) would create risks for both water and energy networks. The agency warned that although higher current returns could be credit positive, total returns would fall if regulators Ofwat and Ofgem underestimate the CPI-RPI differential. Meanwhile, Whitman Howard utilities analyst Angelos Anastasiou told Utility Week that water compa- nies may become "less attractive" to foreign buyers if the government decides to introduce competition into the domestic water market. He said that if and when the market opens for domestic customers, and retail businesses are "stripped out of the core utility" they will become a "less safe" option for investment, although the wholesale activities would still be price-regulated. LV Gas Pension funds eye distribution stake Canadian pension funds Ontario Teachers' Pension Plan and Borealis are lining up a bid for National Grid's gas distribution businesses, according to a report in The Sunday Telegraph. The paper reported that the two funds have held talks about tabling a bid for the businesses, valued at about £11 billion. The two pension funds both already hold 25 per cent stakes in SGN, a gas distribution busi- ness bought from National Grid in 2004. SSE, which owns the remaining 50 per cent, has also been tipped as a potential buyer of National Grid's remaining gas networks. National Grid announced plans to sell a majority stake in its remaining gas distribution businesses in November. The sale process is expected to start this spring and complete early next year. WaTer Firms 'allowed to make excess profits' MPs have condemned Ofwat for allowing water companies to make "excess profits", which they claim have not been shared with customers. A report by the Public Accounts Committee found that Ofwat had consistently over- estimated water companies' financing and taxation costs when setting price limits, allow- ing the firms to make substantial windfall gains from customers' bills being higher than they needed to be. The Committee recommended that Ofwat review its approach to setting allowances for the cost of debt and corporation tax – taking into account the methods used by other economic regula- tors – and report publicly on what actions it intends to take to improve its performance. Water bills have increased by more than 40 per cent above inflation since privatisation, it pointed out. enerGy Centrica said to want to buy Viridian Centrica is preparing a €1 billion plus bid for Northern Ireland's biggest power company, Viridian, according to reports from the Financial Times and Bloomberg. Viridian's current owner, the Bahrain company Arcapita, is believed to have set a deadline of last Friday for first-round bids. Viridian supplies 610,000 homes and businesses in North- ern Ireland with power, and owns gas and wind assets. The FT reported that Centrica was expected to bid alone for the company, but might invite consortium partners to join at a later date to take on the genera- tion side of the business. Sludge disposal: only Wascs affected by reforms 18 | 22nD - 28Th January 2016 | uTILITy WeeK Stock watch 500 400 300 200 Drax share price, Jan 2015 - Jan 2016 Apr 2015 Jul 2015 Oct 2015 Jan 2016 800 600 400 200 Drax share price, Jan 2011 - Jan 2016 2011 2012 2013 2014 2016 Aer dropping 72 per cent since January 2015, Drax's share price will remain volatile in 2016, analysts at Jefferies have said. The investment firm blames the generator's poor performance on the sharp fall in UK power prices, the collapse in clean dark spreads (the power price minus the cost of fuel and carbon allowances) and changes to biomass subsidies. It rates the stock "hold", with a target price of 210p, but says the price could end up anywhere between 142p and 423p. 2015 Jan 2015