Fitch Ratings agency has has downgraded Wessex Water to 'BBB' from 'BBB+' and holding company Wessex Water Ltd's (WWL) Long-Term Rating to 'BBB-' from 'BBB' – the outlook is stable.
Fitch has also downgraded Wessex Water's senior unsecured rating to 'BBB+' from 'A-'.
The ratings agency said the downgrade reflects financial profile pressure from the next price control running from financial years to 31 March 2021 to 2025 (AMP7) as well as Wessex Water's choice of financial policy.
The rating reflects Fitch’s view that the water company is facing a challenging price control as a results of the UK water industry regulator Ofwat’s decision on “a significant step down of the allowed weighted average cost of capital (WACC) to 1.96% from 3.7% for AMP7. The ratings agency said the lower return will put pressure on the company's cash flows and interest cover metrics.
Fitch tightened its ratio guidelines for all rated UK water holding and operating companies in July 2018 to reflect an increase in the business risk from the 2019 price control following a revision of its assessment of independence, predictability and transparency of the regulatory framework to 'bbb' from 'a'.
Fitch is also expecting only a marginal totex outperformance - Wessex Water’s wholesale totex allowance for AMP7 is £2.055bn (in 17/18 prices) - around 6% below the water company’s totex request. However, base totex allowance is £1.54 billion, 9% above Wessex Water’s historical base totex.
Given the increasing operational and environmental performance targets set by Ofwat, Fitch conservatively expects low single-digit totex outperformance during AMP7. During the first four years of AMP6, the utility spent around 10% less than its totex allowances. In the first four years of AMP6, the company demonstrated strong overall operational performance compared with the sector.
Fitch said that Wessex Water's operating position is strong compared with rated peers' in the UK water sector due to a longstanding record of robust operational and regulatory performance.