Ratings agency lowers seven water firms to negative outlook under PR19

Credit rating agency S&P Global Ratings has downgraded seven of its 14 water company ratings to negative outlook as it warned of a peak in risk ahead of a “challenging” PR19 regulatory period.

A regulatory focus on better customer service at a lower cost, and on better operational performance and environmental impact will bring “tighter financial ratios and potentially lower credit ratings,” S&P said.

S&P has forecast a 3% decrease in sector revenues in the first year of the price controls resulting from the fall in allowed cost of capital from about a real 3.4% to a real 2.3%, at a retail price index assumed at 3%. At the same time, according to the agency, stiffer regulatory requirements for better customer service and for reductions in leakage and service interruption will up capital investment by about 10%.

“We believe the worst performers in the sector will suffer,” S&P warned.

“Regulators are bearing down on utility companies in the UK, which are themselves responding to political pressure not only for lower prices for consumers but also improved service quality and higher environmental standards,” said S&P. It went on to report “political, regulatory, and competitive pressures on UK utilities are gradually undermining their credit quality.”

The agency has however acknowledged its view that UK water companies face “low country risk and a strong regulatory advantage.”