Moody's Ratings has today changed to positive from stable its outlook on Southern Water Services Ltd and its finance subsidiary SW (Finance) I PLC.

Concurrently, the ratings agency affirmed the Ba1 corporate family rating and Ba1-PD probability of default rating of Southern Water, as well as the Ba1 backed and underlying senior secured ratings of SW (Finance) I PLC.

The rating action follows publication of Southern Water’s results for the first year of the current AMP8 regulatory period and the announcement, in June 2026, confirming an additional £300 million new equity commitment, to be received by March 2027 and largely provided by a new minority shareholder, Asterion Industrial Partners.

The A1 backed senior secured ratings of those bonds that are subject to a financial guarantee by Assured Guaranty UK Ltd (A1 stable) of timely payments of scheduled interest and principal will continue to reflect the insurance financial strength rating of the guarantor and remain unaffected.

Outlook change to positive

Moody's said the positive outlook reflects a tangible improvement in operational performance and a material reduction in the risk of performance penalties or overspend in the AMP8 period as well as ongoing degearing underpinned by strong shareholder support.

The ratings agency commented:

“Southern Water reported a net performance penalty of around £29 million for FY2025/26, equivalent to a 0.9% reduction on regulatory equity returns (allowed cost of equity is 5.7%, CPIH-deflated). Further amendments, indicated by Ofwat and including the new outturn adjustment mechanism (or OAM) will likely reduce the negative impact.

“This is a significant improvement compared with Southern Water's performance over the previous regulatory period, which resulted in an average reduction on regulatory equity returns of over 2.8% per year. When excluding service measures, which continue to suffer as a result of recent bill increases, the company's performance on operational water and wastewater metrics has been above sector average, a clear indication that the turnaround programme is being successful. Further improvement, supported by its AMP8 investment programme, could lead to net rewards in later years of the period.”

Rating affirmation

Affirmation of the rating reflects Moody’s expectation of operational performance to support financial metrics at least in line with guidance for the current rating. “As reflected in the positive outlook, continued progress under the turnaround programme and further new equity could, subject to political and regulatory developments, support a stronger rating”, the rating says.

Uncertainty around evolution of policy and regulatory environment

However, Moody’s is flagging up that the rating affirmation at Ba1 also considers uncertainty around the evolution of policy and the regulatory environment. The rating states:

“As it seeks to reform the water sector, government has promised to publish a transition plan this year but there is currently limited visibility as to how changes may be implemented or regulation may operate post the planned abolition of Ofwat. Political scrutiny of the sector and its regulation remains high under the new Prime Minister. Regulatory risk is part of demographic and societal trends that are assessed under the social risk considerations of our ESG framework. Water companies in England face elevated social risk (S-4 score) and Southern Water remains exposed to customer dissatisfaction related to its history of operational underperformance.”