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by Karma Loveday

Moody’s downgrades Southern Water following licence breach penalty

Moody’s last week downgraded the senior secured debt ratings of Southern Water Services (Finance) to Baa3 from Baa2 and changed the outlook to stable from "rating under review".

The action concluded Moody’s rating review, initiated on 26 June 2019, which was prompted by Ofwat’s issue of a financial penalty to Southern for significant breaches of its licence conditions and statutory duties. Moody’s noted: “The company will have to pay a penalty of £3m during the current financial year as well as face a revenue reduction of around £123m (in 2017/18 prices) over the course of the five-year regulatory period commencing April 2020, which includes underperformance penalties the company avoided paying in the period 2010 to 2017.”

Moody’s said the action also reflected Southern Water's exposure to a likely significant cut in allowed returns from 2020; a material negative revenue adjustment for weak customer performance in the current period; and challenging cost efficiency and performance targets, as outlined in Ofwat's draft determination.

The ratings agency added that Southern Water's credit quality at investment-grade level remained supported by the company's low business risk profile and the stable cash flows generated under a transparent and well-established

regulatory regime. Moody's also reflected that operating company gearing has reduced to just below 70% net debt to RCV, “which somewhat offsets the pressure of a much weaker adjusted interest coverage ratio”.

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