Moody's downgrades Southern following licence breach penalties

Moody's Investors Service has downgraded Southern Water Services (Finance) to Baa2 from Baa1 and placed the ratings on review for downgrade.

The downgrade followed Ofwat’s announced intention to fine Southern Water for significant breaches of its licence conditions and statutory duties. Southern will have to pay a penalty of £3m in this financial year and return some £123 million (in 2017/18 prices) to customers over the course of the next regulatory period. The penalty includes underperformance penalties the company avoided paying during 2010-17.

Moody’s said its rating action reflected “the additional pressure that the planned £126 million fine and repayment to customers will exert on Southern Water's financial profile in the context of already limited flexibility and Moody's expectation of a tough regulatory price review.”

Moody’s said Southern Water and its employees may face criminal charges following an ongoing investigation by the UK's Environment Agency. The agency, Moody’s warned, Environment Agency fines for pollution incidents had ramped up in recent years. English water companies, it said, had incurred fines of about £35 million since 1999, of which around £21 million were levied in the last three years.