Moody's changes Northumbrian outlook to Baa1 stable from negative

(by Verity Mitchell)

Moody's Ratings has affirmed the Baa1 rating of Northumbrian Water but has changed the outlook to stable from negative. This followed the announcement by Northumbrian Water Group, parent company of Northumbrian Water, of a £400m equity injection from its shareholders. Moody’s also considered the positive impact the final redetermination of tariffs by the Competition and Markets Authority (CMA), published in March. The change reflects Moody’s expectation that the equity injection and the CMA's final tariff settlement will marginally improve the company's cash flow compared with Ofwat's final determination. This will allow Northumbrian Water to maintain financial metrics consistent with a Baa1 rating.

Moody’s expects Northumbrian Water to maintain average gearing, measured as net debt to regulatory capital value (RCV) in the mid- to high-60s in percentage terms including debt associated with the Kielder reservoir. These ratios would be well in line with Moody’s current ratio guidance. This assumes overall total expenditure in line with the CMA redetermination and a net neutral incentive position against AMP8 performance commitments.

Moody’s continued to emphasise that the ratings remain constrained by a deterioration of the UK water sector's business risk amid a continuing trend of negative public perception resulting in more regulatory powers and a focus on enforcement, which has led to higher cash flow volatility and leaner returns. Plans to establish a new regulator add to the uncertainty.

This increased business risk coincides with a period of materially rising investment, with estimated growth in Northumbrian Water's RCV of 38% in real terms over AMP8, based on the CMA's final determination. In this context, the recent equity injection evidences a solid financial strategy, sound risk management and governance considerations.