Moody’s last week changed its outlook to negative from stable on SES Water, while affirming its Baa1 rating.
The rating agency explained the downgrade was tied to Ofwat’s PR19 draft determination.
SES will be exposed to a significant cut in allowed returns from 2020, and faces a total cost efficiency challenge of 18% which is above the sector average of 11%. The key differences between the company's plan and the regulator's efficient cost assessment are around enhancement expenditure and retail costs.
Moody’s also pointed out it had factored in increased regulatory risk and SES Water’s financial policy as indicated in its business plan submission in September 2018. It said: “Specifically, the negative outlook reflects Moody's view that…the company may be unable to maintain credit metrics in line with the guidance for the current Baa1 rating.”
Moody’s further explained its affirmation of SES Water's underlying Baa1 rating reflects, as positives, the company's low business risk profile; historically good operational performance; and partial risk mitigation from the structural enhancements included in its bond covenant and security package.
It added: “The rating affirmation also takes into account management’s efforts to reduce gearing to below 60% ahead of the start of the AMP7 regulatory period in April 2021 to improve its financial flexibility.”