EUR 850.00 For Business Accounts Only

Morningstar | United Utilities to Be Hit by Cut in Regulatory Returns

Much of Britain's water infrastructure is more than 200 years old and could require major upgrades during the next decade. We project that United Utilities, which is one of 11 U.K. water utilities, will invest roughly GBP 500 million annually during the next five years in its water and wastewater system to address those needs. Regulators in Britain approve capital budgets and utility rates once every five years based on utility budget forecasts. Utilities must stay within that budget to achieve sufficient earned rates of return. Recently, the U.K. water regulator cut United Utilities' allowed real cost of capital from 3.6% to 2.3% for the next regulatory regime beginning in 2020, way too low to justify a narrow moat rating despite the efficient scale provided by the natural monopoly.We caution investors to beware of execution risk in Britain's five-year price reviews, as the company must meet performance targets, along with the threat of continued conservation. Given the recent events in the U.K., investors must now also worry about an uncertain political future in the country.