Moody's Investors Service has announced that it has downgraded to Baa1 from A3 the backed senior unsecured debt ratings of Wessex Water Services Finance Plc. The outlook is stable.
The downgrade by the credit ratings agency reflects Wessex Water's exposure to a significant cut in allowed wholesale returns to ca. 2.42% real in cash terms from 2020, compared with 3.6% in the current period, a reduction in total expenditure allowances compared with the company's requests; and challenging PR19 performance targets.
More specifically, the downgrade reflects the anticipated pressure on the company's financial metrics, particularly interest coverage, and Moody's expectation that Wessex Water will be unable to maintain ratios in line with guidance for the previous A3 rating.
Ofwat's allowances for base operating and maintenance expenditure, excluding enhancement projects but including retail costs, were £1.7 billion, roughly £28 million below what the company requested, an efficiency challenge of only 1.6%, but the final determination also included significant disallowances on enhancement expenditure of around £138 million.
In Moody’s view, although Wessex Water may decide not to invest into enhancement projects that it did not receive funding for, this may impact its performance under the outcome delivery incentives and increase the risk of performance penalties.
However, if the company instead chooses to overspend on totex, under the totex sharing mechanism, up to 40-45% of this overspend would be added to the RCV in 2025 or recovered over the 2025-30 period but would result in higher debt and weaker cash flow over AMP7.
O n operational performance commitments, the ratings agency recognises Wessex Water’s strong track record of upper quartile performance on main operational targets, including customer service, leakage, supply interruptions, sewer flooding and pollutions incidents. This generated around £28 million (in 2017/18 prices) of rewards for its performance in the current period that will be carried forward into the next.
Moody’s said the recalibration of performance targets and incentive rates at the final determination supports the potential for similar level of rewards in AMP7. However, given the two-year lag in recognising achieved rewards (or penalties) through revenues, the benefit will only come through partially in the last three years, the ratings agency said.
Moody’s has given a the water company a stable outlook, reflecting its expectation that Wessex Water will maintain financial metrics broadly in line with guidance for its Baa1 rating, taking into account its strong operational and financial performance track record.