Moody's affirms Southern debt rating despite guilt plea in pollution trial

Ratings agency, Moody's Investors Service has affirmed its Baa3 rating for the senior, secured (asset-backed) debt of Southern Water’s finance arm. It came in the same week that Southern pleaded guilty in the crown court.

Moody’s move followed publication by Ofwat, the economic regulator for water companies in England and Wales, of its final determination for the forthcoming regulatory period starting in April 2020 (AMP7). The rating outlook is stable.

The agency said the affirmation reflected its expectation that Southern Water “will be able to maintain an investment-grade credit profile in the face of a challenging regulatory settlement for AMP7, which includes penalties for environmental failures during 2010-17, as well as a likely additional fine from the Environment Agency.

Southern Water pleaded guilty to 51 sewage pollution charges relating to incidents at a number of its wastewater treatment sites between 2010 - 2015. Southern Water has admitted a total of 8,400 incidents of unauthorised sewage releases from its plants. The case is expected to go to the High Court.

Moody’s said it decision was based on considerations of:

• Southern Water’s low business risk profile as the monopoly provider of water and sewerage services;

• the stable cash flows generated under a transparent and well-established regulatory regime; and

• Southern’s reduced company gearing, at about 70%, underpinned by the management's financial policies.