S&P says water regulatory framework offers low financial flexibility

Ratings agency S&P sees “significant execution risks associated with the massive capital investment increase” for AMP8. In a report, it also agreed with the water companies appealing to the Competition and Markets Authority (CMA) that “the current allowance for cost of equity compares unfavourably with other regulatory allowances”.

S&P has revised its view of the preliminary regulatory advantage for water companies in England and Wales to ‘strong/adequate’ from ‘strong’. This brings S&P into line with Moody’s higher regulatory risk assessment published in November 2024.

S&P sees a range of risks. “Some are more pronounced for certain companies and result in different rating outcomes.” The changes affect three companies that have appealed to the CMA, plus Dwr Cymru:

• The agency has lowered by two notches its issue ratings on the senior secured debt issued by Anglian Water Services Financing PLC to 'BBB', and assigned stable outlooks. 

• It has lowered by one notch its issue ratings on the senior secured debt issued by South East Water (Finance) Ltd to 'BBB-' and placed the rating on CreditWatch with negative implications. 

• It has extended its CreditWatch with negative implications on the 'BBB-' rating for the bonds issued by SW (Finance) I PLC, the financing vehicle of Southern Water.

• It has lowered by one notch its issue ratings on the debt issued by Dwr Cymru (Financing) UK PLC to 'BBB+' for class B debt and to 'BBB-' for class C debt, and assigned a negative outlook to both classes. Dwr Cymru is the process of issuing significant amounts of new debt in 2025 but did not appeal its price determination.

Commenting on the Cunliffe review, S&P said the reform agenda “will likely result in significant changes to the UK privatised regulated model. Although we think this would not necessarily result in a worse outcome for the England and Wales water sector, we expect a period of uncertainty in the regulatory environment.”