Moody’s downgrades Wessex Water

Moody’s has downgraded Wessex Water from A3 to Baa1, following the company’s acceptance of Ofwat’s final determinations for PR19.

The agency said this reflected the sector-wide cut in allowed returns; a totex reduction compared to company requests; and challenging performance targets.

On totex, Moody’s reported: “Ofwat's allowances for base operating and maintenance expenditure,

excluding enhancement projects but including retail costs, were £1.7bn, roughly £28m below what the company requested, an efficiency challenge of only 1.6%, but the final determination also included significant disallowances on enhancement expenditure of around £138m.

Although Wessex Water may decide not to invest into enhancement projects that it did not receive funding for, this may impact its performance under the outcome delivery incentives and increase the risk of performance penalties. If, on the other hand, the company chose to overspend on totex, under the totex sharing mechanism, up to 40-45% of this overspend would be added to the RCV in 2025 or recovered over the 2025-30 period but would result in higher debt and weaker cash flow overAMP7.”

Moody’s noted Wessex was a strong operational performer, carrying forward from AMP6 £28m of rewards. It said the company had the potential to earn similar rewards in AMP7, but that these would not come through until the final three years of the period.

It concluded Wessex looked set to exhibit an Adjusted Interest Coverage Ratio around 1.4-1.6x, below the 1.7x guidance for the previous A3. Gearing is expected to remain around 70-72% of net debt to RCV.