Risks Flashcards
What are the key risks for a water company like United Utilities
- regulatory risks
- Operational risks
- Environmental risks
- Financial Risks
- Cyber security risks
Take me through Regulatory risks and why it’s important.
The water industry is heavily regulated by airway, which sets price controls, allowed returns and performance targets.
Changes in reg can directly impact revenue and profitability. Eg, if Ofwat lowers the allowed return on RCV, companies might see reduced revenues.
E.g. the introduction of new regulations, like the Environment Act 2021, which requires substantial reductions in storm overflows, forces companies to adapt their investment plans and strategies quickly.
Take me through Environmental Risks and why it’s important
The water industry is highly exposed to climate change and extreme weather events like floods, droughts, and changes in water availability.
Climate impacts can disrupt water supply , increasing operational costs and capital investments in infrastructure.
Operational Risks
The industry relies on complex water treatment and distribution infrastructure.
Risks include asset failure, supply interruptions and water quality issues.
These failures or interruptions can lead to service outages and water quality incidents, attracting penalties from Ofwat , damaging reputation and increasing costs.
Financial Risks (Inflation & Interest Rates)
The water industry is capital intensive, with significant reliance on debt financing to fund long-term infrastructure projects and is therefore impacted largely by interest rate fluctuations.
Higher Interest rates raise the cost of debt.
Inflation increases the cost of materials and index linked debt.
Inflation and other factors also drive up power costs. Companies often use hedging strategies to lock in energy prices and stabilise costs.
Cyber Security Risks
Water companies are increasing relying on digital systems for operations, including network management and customer data
