Mixed ratings fortunes as more water firms accept PR19 final determinations
Moody’s has said it expects United Utilities’ adjusted interest coverage to weaken but remain above its guidance for A3 during AMP7. This follows the ratings agency’s scrutiny of the PR19 final determination (FD) package UU accepted on 29 January, as well as the company’s plans to grow its dividend in line with CPIH inflation over the period while maintaining gearing within the current range of 55-65% of Regulatory Capital Value.
Moody’s said UU’s FD is a modest improvement on its draft determination. Its totex gap remains very small and changes to Outcome Delivery Incentives would reduce penalties by £50m, compared to the draft, if the company performed in line with its original business plan. It added: “But UUW has made significant investments to improve performance since submitting its business plan and, in an investor call, management expressed confidence that it will be able to achieve rewards on some measures.”
On Friday, Moody’s downgraded to A3 from A2 the corporate family rating of Dwr Cymru (Welsh Water) as well as the senior secured debt ratings of Dwr Cymru (Financing) UK Plc. This followed the company’s announcement that it will not ask Ofwat to refer its FDs to the Competition and Markets Authority.
Moody’s said the downgrades reflect the PR19 cut in allowed returns (which “put particular pressure on companies, like Welsh Water, with relatively expensive debt”); totex gaps – £171m (22.5%) on enhancement and £25m (10.9%) on household retail, offset by £10m more on base than Welsh Water’s business plan request “and management expects to be able to offset the remaining efficiency challenge on enhancement and retail expenditure through additional savings on base costs”; and challenging performance targets, which Moody's expects to result in financial penalties of £30-40m during the next regulatory period.
Moody's said its base case scenario is that Welsh Water's Adjusted Interest Coverage Ratio (AICR) will be around 1.5x over AMP7, in line with guidance for the A2 rating but exposed to the risk of operational or financial underperformance. And that gearing is expected to remain outside the maximum 55% for an A2 rating. It added: “Moody’s notes that Welsh Water remains one of the lowest geared companies in the sector and, due to its not-for-profit ownership structure, does not face any dividend pressures. It has shared previous outperformance with customers through reduced bills and increased investments but only plans to share £55m in aggregate over the AMP7 period.
Any additional so-called customer dividends remain at the company’s discretion and cash retention will help offset financial pressure from a challenging review.
“In this context, Moody's AICR guidance for Welsh Water is materially less demanding than for peers, given the benefit of the company's ownership and governance structure as well as the Welsh Government's more cautious stance toward competition.”
The Wessex board accepted its FD but warned Ofwat that the settlement could impede infrastructure investment.
“We believe long-term investment is needed, not short-term bill cuts, a company spokesperson said, adding: “While the board has accepted the determination, customers want more investment in infrastructure to future-proof services."