Fitch optimistic PR24 final decisions will help de-risk water for investors

Fitch Ratings expects Ofwat to shift significantly from its draft determination (DD) positions when it announces final determinations (FD) for PR24 on 19 December.

Yeshvir Singh, senior director at Fitch Ratings and lead UK water analyst, commented: “Fitch expects that the FD… will partially de-risk the sector compared with the DD by incorporating a higher WACC, increased allowed totex and less aggressive outcome delivery incentive (ODI) framework. The risk and return profile defined by the FD will be a critical factor to attract the equity and debt needed in the sector, preserve trust from the capital markets and protect credit ratings during the capex super-cycle needed to enhance the asset base (not limited to AMP8).

"We see higher sector risk following the latest developments, but we have not yet revised the debt capacity for UK water companies, since we believe that the extent of the de-risking provided by the FD will be an essential input for the decision. Similarly, rating actions will depend not only on the key features of the FD, but also on the companies’ willingness to adjust their capital structures and adhere to their target ratings, even in the presence of a potentially revised debt capacity.

"We believe shareholders are generally committed to supporting their respective companies with equity injections and limited (or no) distributions during AMP8, but the risk-return balance will be the key consideration for their investment committees. Also excluding the complex situation of TWUL [Thames Water], fresh equity and more conservative capital structures will be essential for some companies to comply with Ofwat’s licence requirements, which include a minimum rating of ‘BBB’/Negative starting in April 2025. Also, these measures will be crucial in more cases to preserve the current ratings.”