Moody’s downgrades the UK water sector to A from Aa

As first flagged in its 14 August sector review, Moody’s on Wednesday changed its assessment of regulatory stability and predictability in water, leading to a downgrade of the whole sector to A from Aa. Moody’s has as a result changed its ratio guidance on cashflow and balance sheet metrics for a given rating.

The downgrade puts the sector at a two-notch discount to similarly regulated UK electricity networks, rated Aaa. Moody’s action will need to be taken into consideration by the Ofwat board as it signs off on the final price determinations for 2025-2030 this month.

Moody’s said: “Regulatory penalties are contributing to increasing cash flow volatility and weaker financial metrics, particularly for companies with a poor performance track record.”

The outlooks for Northumbrian, United Utilities, Wessex and Yorkshire were changed to negative. Anglian, Welsh and Affinity were placed on review for possible downgrade. Southern Water and South East Water were downgraded a notch. Southern Water is now sub investment grade, downgraded from Baa3 to Ba1, and South East Water to Baa3 from Baa2, at the bottom of investment grade. Both are on review for further downgrade.

Negative outlook for United Utilities 

Even the most well capitalised water company, United Utilities (UU), has seen the outlook on its utility (A3) and PLC (Baa1) ratings changed from stable to negative. Moody’s said that “considering our changed view of the sector's business risk, UU will need to achieve gearing, measured as net debt to regulatory capital value (RCV), no higher than 60% (65% previously), and an adjusted interest coverage ratio (AICR) of at least 1.8x (1.7x previously) on a sustainable basis to maintain its current ratings."

Moody’s noted that UU might have to take “mitigating action” to protect its credit quality given its large investment programme to avoid the one notch downgrade. A downgrade would bring it into line with Severn Trent which remains rated Baa3/Stable by Moody’s because “of additional financial flexibility created from its recent £1bn equity raise”. Its minimum Baa1 target ratios have also been increased given the sector risk reassessment. Severn Trent Water and Severn Trent Plc must maintain net debt to RCV no higher than 68% (72% previously), and an AICR of at least 1.6x (1.5x previously) on a sustainable basis. 

Southern Water ‘junk’ status but with liquidity 

Most affected by the rating action was Southern Water, which Moody’s downgraded to sub investment grade from Baa3 to Ba1 and on review for further downgrade. Southern has both operational and financial challenges and has not managed to improve its performance, rated ‘lagging behind’ compared to Thames Water (now average) in Ofwat’s performance report released last month. Southern has just raised premium-priced debt in the market; Moody’s confirmed that Southern has good liquidity at present and that it expects current funds to last to February 2026 before financial swap payments are due.

Stuart Ledger, Southern’s chief financial officer, said: “The action by Moody’s Ratings today reflects the growing challenges and uncertainty faced by all companies operating in the UK water and wastewater sector. Ofwat’s final determination on 19 December should help to alleviate much of the uncertainty around the sector and enable us to continue to improve our services for customers, with the support of our shareholders and lenders.”