Last July, Anglian Water Services (AWS) brought a £3.5 billion whole business securitization to market, which ring-fenced the water and wastewater businesses of the Anglian Water Group. AWS is the fourth-largest water company in England and Wales.
AWS has been described by the industry regulator, the Office for Water Services (Ofwat), as one of the least-efficient companies in the industry. That observation was cited by Moody's Investors Service as a concern in the original whole business deal. What is the company doing to address this criticism?
Not necessarily true, Ofwats' indications are that we are of average efficiency. This is one of the areas where the ring fencing and the WBS deal has been a great help for Anglian Water Services. It has enabled us to focus on the activities of a water and waste water supplier. Now we are focused on delivering our services at a high level of performance and a high level of efficiency. We've set operational and financial targets aimed at improving our levels of performance and efficiency. We were and are part of a wider group but one thing we did as part of the refinancing the business was we ring-fenced only the water and waste water activities and now its employees and management are incentivized purely around AWS rather than the group performance.
The next regulatory period set by Ofwat may be challenging for AWS in terms of operation expansion targets and the prospect of reduced profitability under new price limits. How is AWS seeking to overcome these hurdles?
At the next price review, the new regulatory obligations we have to meet will be funded through the price review. However, we are preparing the organization to address the regulatory targets and setting ourselves targets to improve efficiency to ensure the business continues to perform. We have initiated a competitive tendering and outsourcing program to see where the market place can add value where we aren't efficient. Clearly, our profitability will come under pressure, but at this stage it isn't clear what [Ofwat] is going to do and if our profitability will be reduced.
Are there any initiatives afoot to reduce the leverage within the whole business structure, which is now 85% of the regulated asset value?
No. We geared up to 85% on the basis that we believed it was most efficient capital structure for the business to reduce the cost of funding going forward. So, to de-leverage would be counterintuitive.
Going forward where will AWS look to raise cash to fund capex and operational improvements?
We'll be raising cash going forward to fund the remainder of our capex program and we'll be looking in the public debt markets through the medium-term note program we put in place last year. We have a significant capex program through to 2005 and beyond that. We are keen to give ourselves access to a wide range of capital markets to ensure we can fund this program. We will probably use the bond markets and private placements. We like inflation-linked debt, because our price increases are linked to retail price inflation, so index-linked bonds are a natural hedge for us.
Do you have any near-term financing needs?
When we leveraged up last July, we borrowed to pre-fund 12 months capex so we will be returning to the capital markets within the financial year in the ways discussed above.
Are there any plans to refinance parts of the whole business deal?
At the moment, no. Our financial covenants set us a series of tests. We need to keep a balance between the A-rated and triple-B rated debt and we have to maintain the elements of the [whole business securitization] structure to meet the financing tests.
What criteria does AWS use in selecting a lead underwriter for a bond deal or securitization?
Price, confidence they can get the deal away in market, a good understanding of the market place and investors and an understanding of the water sector. If they are going to be able to get our deal away, they need to understand the industry.