Moody's Investors Service says it expects Thames Water to get an AMP8 decision from water sector regulator Ofwat which will enable it to secure the future investment it needs from shareholders.

The ratings agency expressed its opinion in its latest FAQ briefing paper on infrastructure and project finance outlining the most common questions Moody's has received from investors in the regulated water sector.

In recent months, the water companies in England and Wales have seen unprecedented press and public attention concerning their operating and financial performance. Highly leveraged companies have received particular scrutiny around their overall financial resilience. Thames Water is in the spotlight following a default at its unregulated holding company, Kemble Water Finance Ltd, with various commentators predicting an imminent collapse.

However, Stefanie Voelz, VP-Sr Credit Officer at Moody’s Ratings says in the paper:

“Our expectation is that Thames Water will ultimately be able to secure a regulatory determination that provides a balance of risk and reward that supports future equity injections. This view reflects that the Water Services Regulation Authority (Ofwat), the economic regulator for water and wastewater companies in England and Wales, has a long-standing track record of transparent and predictable regulation, which includes allowances for efficient costs and a fair return.

“It also takes account of the regulator's duty to ensure that companies can “finance the proper carrying out of their statutory functions”, implying that regulatory determinations should provide a risk-return balance that attracts sufficient new capital, debt as well as equity.”

Moody’s opinion will be undoubtedly be welcomed by Thames Water, which, together with the other water and wastewater companies in England and Wales, is awaiting publication on 12 June by Ofwat of its draft determinations for the utilities' AMP8 2025-30 business plans.

For the sector as a whole, given the regulator's track record of transparency and predictability, as well its overarching duty to ensure companies can finance their functions, Moody’s is anticipating a regulatory determination that balances risk and return, thereby allowing the industry to raise equity (and debt) to fund its sizeable investment needs.

Despite this, the ratings agency believes that Thames Water's liquidity will have to be replenished before the conclusion of the 2024 price review to bridge the gap until new equity is received.

Stefanie Voelz warns:

“ However, to maintain credit quality, it will need to replenish its liquidity ahead of the final determination and also obtain equity financing during AMP8 to support the ambitious investment programme.”

Nonetheless, Moody’s does not expect this to materialise before Ofwat’s final determination which is due in December 2023, or the conclusion of any potential appeal by the UK’s largest water company against the regulator’s decision which subsequently transpires.

In Moody’s opinion, the Government would only consider special administration for a regulated utility as a last resort - which would not equate to nationalisation but could result in (temporary) government ownership if no new investors could be found in the private capital market.

Stefania Voelz comments:

“While the regulator acts independently, political intervention cannot be ruled out, given the strong public interest in Thames Water; however, this is not our base case assumption.”

Addressing the question of how Southern Water compares to Thames Water, the paper says Southern Water “provides both a precedent for Thames Water's situation and the most comparable situation today.”

Voelz continues:

“Southern Water remains in a difficult financial situation, in many respects comparable to Thames Water….

“Like Thames Water, it faces significant holding company debt maturities in calendar year 2025.. that it may be unable to refinance if the final determination does not maintain investor confidence.

“Southern Water's operating performance also remains weak, with performance penalties and totex overspend significantly larger than at Thames Water, and its business plan proposes the highest tariff increases in the industry.”

Commenting more broadly on what factors Moody’s is considering in the run up to Ofwat’s draft determination in June, she says:

“We currently have a negative outlook on the UK water sector reflecting negative public sentiment, which may increase pressure on the Government and regulators to change established frameworks and set potentially unachievable targets.

“Public perception is of a sector failing to deliver on leakage and wastewater treatment; however, global comparisons suggests the UK water industry is doing no better or worse than companies elsewhere. This could make the sector less attractive to investors ahead of its largest investment programme since privatisation.”

However, Voelz concludes:

“Overall, we believe that an independent regulator with a long-standing track record of being transparent and striving to set a fair return, will find a balance that allows investors to continue to provide funds to the sector.”

Click here for more information about the Moody's briefing paper  Regulated Water Utilities – UK: FAQ: Sector navigating choppy waters