Moody’s puts South East Water on review for downgrade, following Draft Determination

Moody’s has put the Baa2 backed and underlying senior secured ratings of South East Water (Finance), the finance subsidiary of South East Water (SEW), on review for downgrade, in light of the company’s PR24 Draft Determination.

The agency said the settlement, if unaltered, could feature an estimated £15m of Outcome Delivery Incentive penalties, with water supply interruptions the biggest block. Ofwat has set SEW a supply interruption target of five minutes, which Moody’s noted was almost 70% below the company view of what is attainable. Ofwat has also doubled the maximum penalty exposure, expressed as a percentage of regulatory equity, for missing the target. Moody’s did not expect significant concessions on this element at Final Determination.

On top of that, South East Water received one of the largest cuts in base expenditure in the sector, and the largest enhancement cut. Moody’s noted the firm may need to incur unfunded enhancement expenditure to bolster resilience. There is also a £6m penalty for the unambitious nature of South East’s business plan, in Ofwat’s view.

Moody’s said: “The resulting reduction in operational cash flows would weaken SEW's Adjusted Interest Coverage Ratio which is already depressed by the company's relatively high leverage – net debt to regulatory capital value was 77.5% as of March 2024 – and embedded debt costs.”