Fitch: water firms need £7.5bn of equity to support PR24 totex

The water industry needs £7.5bn of equity injections to support PR24 totex ambitions, Fitch Ratings has calculated (based on the companies it rates). This is largely uncommitted as yet, and a 77% increase compared to AMP7.

The requirement is not evenly spread across the industry, with Thames and United Utilities particularly equity hungry (see chart). Fitch argued securing the equity will be largely contingent on Ofwat’s final determination and its risk/return balance.

Fitch further noted that 45% of the companies it rates included a higher weighted average cost of capital (WACC) than Ofwat’s early view (3.29% real CPIH based), anticipating a higher cost of equity. The agency shared its view that the redetermined WACC will be higher in Ofwat’s final determination due in December 2024, given risk-free rates and iBoxx indices have materially increased since September 2022 (Ofwat’s cut off date for its early view).

In a note, Spotlight: UK Water Business Plans, Fitch said it did not expect to take rating actions solely on the basis of October 2023 business plans. While higher totex, tougher statutory requirements, a clear change in efficiency targets and a tougher incentive package were expected to weigh on credit profiles, these could be offset by stronger capital structures driven by the equity injections and significant revenue increases.