Moody’s: water outlook for 2021 weaker but stable

Moody’s said in a report last week that the outlook for regulated water companies in 2021 had turned stable, though remained weakened by a tough price settlement and coronavirus impacts.

The ratings agency said the stability reflected more certainty on allowed returns and cost allowances over the five-year period from April 2020. Stefanie Voelz, a Moody's vice president - senior credit officer and the report's author explained: “While the unprecedented cut in allowed returns has significantly weakened interest cover ratios across the sector, there is now certainty on allowed returns until March 2025 and we expect companies’ credit ratios to stabilise at a weaker level.”

She further noted that while the Competition and Markets Authority’s Provisional Findings in the cases of Anglian, Bristol, Northumbrian and Yorkshire Water could have improved the four companies’ financial metrics “markedly,” the CMA’s January paper on cost of capital would mute the metrics improvement, if the 30 basis point reduction proposed stands when final decisions are issued.

On Covid-19, Moody’s said: “For the sector as a whole, revenue has fallen as businesses use less water during the pandemic. While the regulator allows this lost revenue to be recovered with a lag, it could be more than offset by penalties for underperforming regulatory targets. Covid-19 could also make meeting already demanding targets harder.”

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