Moody's Investors Service has today affirmed theBaa1 corporate family rating (CFR) of Affinity Water Limited, together with other ratings on the water company’s medium term note programme, and  affirmed the outlook on all ratings is stable.

 The ratings agency said Affinity Water's Baa1 CFR reflected:

• stable cash flow generation from the provision of monopoly water services under a well-established, transparent and predictable regulatory regime;
• strong operational performance in the current regulatory period despite challenging efficiency targets;
•  "enhanced" status in the PR14 price setting process, which provides early visibility about its allowed total expenditure in the AMP6 regulatory period and confirms that the England and Wales water and sewerage regulator (Ofwat) views its business plan as among the most efficient in the industry;
• creditor protections incorporated within the company's financing structure.

The stable outlook reflects the rating agency's expectation that Affinity Water's AMP6 final determination will not change compared with its draft determination in a material adverse fashion  and that ratios will remain in line with Moody's guidance for a Baa1 CFR throughout AMP6.

Like its highly-leveraged peers, Affinity Water's credit quality is constrained by the expectation that the company will maintain a highly leveraged financial structure with net debt to regulatory capital value, with RCV expected to remain close to the targeted level of 80%.

However, Moody’s cautioned that given the utility’s management's intention to maintain overall gearing close to a target level of 80%, there is limited potential for an upgrade in the assigned ratings.

Downward pressure could materialise following for three principal reasons:

• unexpected severe deterioration in performance that resulted in the company's net debt/RCV ratio being persistently higher than 85% and hence the company being in breach of the distribution lock-up trigger; or which resulted in the company's adjusted interest cover being persistently below 1.2x ;
• the introduction before the December final determination of a currently unforeseen adverse regulatory change against which Affinity is not protected by Ofwat;
•  a material adverse change in the regulatory framework.