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  • by Karma Loveday

Moody’s: water’s stable outlook for 2022 is finely balanced

Regulatory certainty from fixed allowed returns to March 2025 is balancing risk coming from other areas for UK water utilities, and resulting in a stable outlook for the sector as 2022 dawns, according to Moody’s.

In a research note, Moody’s listed as risks:

  • the impact of the pandemic;

  • rising inflation;

  • interest rate changes; and

  • pollution penalties.

Pandemic

The effects of the pandemic on volumes and rewards/penalties for operational performance "could add, on average, 0.1x to Moody's adjusted interest cover ratio (AICR) in 2022-23, but for individual companies the impact would be up to +/-0.5x in that year.”


Inflation

While water companies would benefit here from revenue and RCV growth, inflation-linked debt (around half of sector debt) and debt service costs would also grow.


Interest rates

Changes in interest rates these could affect interest coverage metrics for companies with large refinancing needs in particular.


Pollution penalties

Should penalties follow from the regulatory wastewater investigation announced late last year.

Moody’s said its stable outlook could change to negative “if it appears likely that the credit fundamentals for the sector will deteriorate, in the context of a weakening economic outlook or greater affordability constraints preventing companies from being able to fund necessary investments to improve or enhance performance. Ongoing regulatory pressure continues to weigh against a positive outlook”.

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