Fitch Ratings: water sector outlook now improving, not deteriorating

(by Verity Mitchell)

Fitch Ratings saw an improvement for water in its UK Utilities Outlook for 2026. It said that the Cunliffe review proposals constructively target financial stability, regulatory consolidation and stronger consumer protection. The core recommendation – an integrated water regulator for England and a similar body for Wales – should simplify oversight, cut duplication and close gaps. Fitch said it is too early to judge the effects of these changes on its regulatory assessment, but the model could improve predictability, supervision and long-term planning.

This ‘improving’ water sector outlook is in contrast to Fitch’s ‘deteriorating’ outlook in 2025. Alongside the Cunliffe proposals, the Competition and Markets Authority's (CMA) determination, setting the weighted average cost of capital 26bp above the final determination and with £550m in additional allowances, should support companies on Negative Outlooks. 

Fitch expects to review its ratings in the first half of 2026. It pointed out that its expectations for equity support have materialised in 2025 for Southern Water and Anglian Water at utility, midco and holdco level. The remaining commitments from others are largely contingent on the CMA’s final outcome.

Despite the improvement, Fitch factored potential sector fines of about £600m from the Environment Agency or Ofwat into its forecasts, noting that in some cases authorities may direct penalties into customer redress packages. It also assumed cumulative in-period Outcome Delivery Incentives (ODI) penalties of £940m for AMP8, partially offset by ODI rewards of £380m, resulting in net cash ODI penalties of £560m for its rated portfolio. It will of course, continue to review these assumptions.