31st Jan 2020 18:08
(Alliance News) - Moody's Investors Service has downgraded its rating for Severn Trent PLC to Baa2 from Baa1, following the FTSE 100 water utility's decision on Tuesday to accept Ofwat's final determination for subsidiary Severn Trent Water.
The rating downgrades accounts for Severn Trent's exposire to a significant cut in allowed wholesale returns to 2.4% in real cash terms from April, on a 50:50 blended inflation basis, compared to 3.6% in the current period.
There are also challenging sector-wide performance targets set by Ofwat, which could lead to financial penalties for Severn Trent. However, the ratings agency said the group could offset these losses with rewards received in the current period and carried into AMP7.
On Tuesday, Severn Trent said the decision to accept the determination had been made by taking into account the total expenditure allowance for the next five years of GBP6.8 billion and its "stretching, but achievable" suit of customers desired outcome.
The third reason for the downgrade was Severn Trent's updated dividend policy. The group expects to pay 101.58 pence per share in dividends for the year ending March 2021, up from 100.08p set for financial 2020, using consumer price index of 1.50%.
"Moody's also notes that stringent performance targets set by the regulator could lead to performance penalties over the AMP7 period. The risk is concentrated around the mains repairs commitment and could be significant if performance is in line with the company's April 2019 business plan," Moody's stated.
"However, the rating agency understands that, since its business plan submission, the company has been working to introduce measures that would allow it to achieve performance in line with the
target and avoid penalties," the credit agency added.
Moody's has a Stable outlook for Severn Trent, which reflects the agency's expectation that the group will be able to maintain its financial metrics in line with guidance.
Shares in Severn Trent closed 0.6% lower at 2,579.00 pence on Friday in London.
By Dayo Laniyan; [email protected]
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