By Marc Jones
LONDON (Reuters) -Moody’s put Britain’s Southern Water on a “junk” rating downgrade warning on Tuesday, less than a week after stripping the UK’s most troubled provider Thames Water of its investment grade score.
The rating agency cited this month’s draft decision from UK regulator Ofwat that Southern would not be allowed to raise customer bills as much as requested, as well as tens of millions of pounds of impending fines.
“The review for downgrade reflects our expectation that Ofwat’s draft determination would, if not materially changed… result in severe Outcome Delivery Incentive penalties and total expenditure allowances below the level needed to fund Southern Water’s investment programme,” Moody’s said.
“Together with an allowed return that falls significantly short of Southern Water’s actual cost of capital, such under-performance may challenge the company’s ability to raise equity finance to maintain leverage at levels consistent with the current rating,” it added. That current rating is Baa3, the last rung of investment grade.
Southern, which is majority owned by Australian investment firm Macquarie, the former owner of Thames Water, said Moody’s warning have “no material impact” on the firm and over 850 million pounds of available liquidity.
It had asked Ofwat to be able to hike bills by 73%, the most of all the English water providers, but the regulator proposed a 44% rise instead.
POLLUTION
Moody’s also highlighted that Southern is in line to be hit with at least 35 million pounds of “Outcome Delivery Incentive” penalties, fines which are likely to continue to be £19 million a year going forward, or £60 million if there are no improvements.
Ofwat’s draft determination would commit Southern Water to reduce the number of pollution incidents by 81% compared to the last four years. Most other companies are required to reduce incidents by less than 30%.
Moody’s calculated in a “plausible scenario” Southern will need to raise 4.5 billion pounds ($5.8 billion) of debt and equity between now and the end of the decade.
To maintain a “leverage ratio” at around 70% that raise would need to include over 800 million pounds of net equity contributions although there is “no certainty” that Macquarie would provide the money, Moody’s warned.
It said it was expected to conclude the rating review after Ofwat publishes a final price determination plan in December, although it could conclude it sooner if there was “material additional information”.
($1 = 0.7795 pounds)
(Reporting by Marc Jones; Editing by Amanda Cooper and Conor Humphries)
