S&P Global Ratings has revised its outlook on Portsmouth Water and Northumbrian Water to negative.
The ratings agency said it expects both companies to come under pressure in the next regulatory period, AMP7, running from 2020-2025.
Once AMP7 begins S&P expects Portsmouth Water’s ratios to “come under more pressure” due to the company’s commitment to reduce customers’ bills while significantly increasing its planned capital expenditure.
Following this, the company may struggle to maintain metrics in line with its current rating.
The ratings agency did however say that before Portsmouth Water is required to resubmit its business plan to Ofwat and the regulator’s final determinations, it believes the company could still adjust certain factors to sustain its adjusted funds from operations to debt at 7 per cent.
S&P said “several elements” of Northumbrian’s business plan submission and the initial feedback from regulator Ofwat indicate that the company’s credit metrics will come under pressure from the start of the next regulatory period in April 2020.
Meanwhile, higher capital expenditure, with a yearly average of £320 million for AMP7 in comparison to approximately £210 million for AMP6, may hinder Northumbrian’s ability to generate positive cash flow for the next regulatory period.
Both Portsmouth Water and Northumbrian Water were placed in the “slow track” category in Ofwat’s initial assessment of their PR19 business plans.
Ofwat says companies in the slow track category have “further work to do” on their plans.
In the case of Northumbrian, Ofwat said in its assessment of its PR19 plan that it was of “high quality” in terms of customer engagement, affordability and vulnerability but that it fell short in other areas including, among other things, securing cost efficiency, delivering outcomes for customers and securing long-term resilience.
Portsmouth meanwhile performs well on cost efficiency according to Ofwat but falls short in engaging customers, delivering outcomes and long-term resilience.
Both will have to demonstrate they have addressed the shortcomings the regulator has identified when they resubmit their plans by 1 April in order to be viewed more favourably.
Northumbrian Water declined to comment and Portsmouth Water was contacted for comment but had not provided one by the time of publication.