Credit ratings agency Moody's has affirmed Northumbrian Water's ratings at Baa1, and changed its outlook to stable from negative.

Moody's rating action follows the completion of the acquisition in October 2011 of Northumbrian Water Group Plc by UK Water (2011) Limited, which is indirectly wholly-owned by a consortium of Cheung Kong Infrastructure Holdings Limited, Cheung Kong (Holdings) Limited and Li Ka Shing Foundation Limited. The consortium acquired NWG for a cash consideration of around £2.4 billion.

Moody's assessment of NWL's stand-alone credit quality is based on the rating methodology for regulated water utilities, published in December 2009.

Overall, the Moody's rating takes into account NWL's very low business risk profile, described as characteristic for the UK water sector as a whole, which benefits from relatively stable and predictable cash flow generation under a well-established and transparent regulatory framework.

Moody's said it also “takes comfort” from the fact that Cheung Kong, which holds stakes in other UK regulated utilities, such as Northern Gas Networks Limited and UK Power Networks, the three electricity distribution networks acquired from Electricite de France in October 2010, has been applying a relatively prudent financial policy to its holdings, and will use a similarly conservative funding approach to NWL.

NWL's current Baa1 rating and stable outlook reflect’s Moody’s expectation that there will be no additional external debt funding allocated within the wider UK Water group.

However, Moody’s said its ratings could come under downward pressure in the event of any deterioration of the NWL's financial profile. More generally, a material adverse change to the water regulatory framework or unforeseen funding difficulties could also result in a rating downgrade.

Introduction of competition could see deterioration in UK water sector credit rating

In October 2011, Moody's assessment of its outlook for the UK water sector as a whole remained stable, despite what it described as  “a degree of regulatory uncertainty”  while regulator Ofwat continued its wide-ranging sector review.

Moody's said the outlook reflected its belief that Ofwat recognised the need to maintain investor confidence and company performance that has been broadly in line with expectation. However, Moody’s warned that while Ofwat had made assurances that existing creditors will be protected, changes including the introduction of 'market forces' could result in a deterioration of the credit standing of the sector.