Moody’s: Water sector outlook stays ‘unfavourable’ amid £70bn debt pile

The business risk faced by Britain’s water companies is growing as the sector struggles to attract investment amid vocal public, political and regulatory pressure, Moody’s has warned.

The credit ratings agency, which this summer helped nudge Thames Water into breach of its operating licence with a downgrade, on Tuesday maintained a ‘negative’ outlook for the sector. 

It flagged continued underperformance, driven by overspending and regulatory fines.

Moody’s said water companies, which have combined net debts of over £69.5billion, are suffering ‘diminishing investor confidence’ ahead of a crunch final decision on household bills expected at the end of 2024.

Industry watchdog Ofwat in July revealed its draft decisions for how much it would allow firms to hike bills over the next five years.

While bills are expected to rise by £94 on average over the period, Ofwat’s determination fell well short of what many water companies say they need to upgrade critical infrastructure while continuing to attract investor capital.

Chris Weston, chief executive of Thames Water, said Ofwat’s proposal that it can raise bills by 23 per cent by 2030 would leave Britain’s biggest water company ‘neither financeable nor investable‘.

Thames, which sits on top of a £16.2billion debt pile, wants to increase bills by 52 per cent over the period instead.

Moody’s said on Tuesday that while Ofwat’s final determinations ‘are typically less onerous than drafts’, the water industry’s ‘business risk is growing with ongoing public, political and regulatory pressure diminishing investor confidence’.

The firm said it could change its outlook from ‘negative’ to ‘stable’ if Ofwat’s final determination ‘proves supportive of companies’ investment needs or management and shareholders take mitigating action to bolster credit quality’.

Many water firms ‘are laying the groundwork for an appeal’ to the Competition and Markets Authority’ if ‘the risk and return profile is not rebalanced in their favour’ in Ofwat’s final decision, according to Moody’s.

Moody’s said: ‘Should companies decide to appeal these to the CMA, the ultimate…settlement may not be known before autumn 2025, because the CMA typically has six to 12 months to process the appeals.

‘Weak operational performance, exacerbated by tough regulatory targets, may make it harder for companies to attract equity investment in the future.

‘An unfavourable risk-return profile will ultimately increase the cost of funding and therefore the bills paid by consumers.’