Case study Flashcards
How do water companies recover revenues?
By summing together :
1. allowed return on the company’s asset base (RCV)
2. Allowed operating expenditure (Opex)
3. Depreciation of the RCV
Why are only ‘allowed’ operating expenses taken into account?
Only the costs deemed efficient by Ofwat are classified as ‘allowed’, even if the company’s actual operating costs might differ.
This aims to ensure that consumers aren’t paying for inefficiencies
Why is depreciation included in the calculation of recovered revenues?
It ensures that water companies can gradually recover the investment costs of their long term assets over time.
What is the regulatory Capital Value?
This is the value of the company’s assets, primarily infrastructure, like water pipes and treatment facilities.
The regulator sets this value and forms is as a base for calculating allowed returns.
How do you assess the risk of over leverage in a water company?
Evaluate actual vs notional gearing
Interest coverage ratio
Cash flow stability
Capex Needs
Debt maturity profile
Leverage relative to peers
Parent company implications.
Sensitivity to interest changes
How does the allowed return set by regulators affect the financial strategy of a water company?
- if regulators set a higher WACC, the allowed return increases, making it more attractive for water companies to invest in new infrastructure.
- a higher allowed return might encourage companies to use more debt financing (since WACC included cost of debt)
What is a public private partnership? (PPE)
A PPP is a collaborative agreement between a government entity and a private sector company.
These partnerships typically involve sharing resources risks and rewards to fund build and operate project like transportation systems hospitals or schools.
