Fitch has raised its outlook for integrated utilities in the UK from “negative” to “stable” due increasing power prices and clarity over the level of the price cap on default tariffs.

Nevertheless, the rating agency said they will still face “significant challenges” as growing investment requirements put pressure on cash flows.

Fitch said the rosier outlook was partly supported by steps taken by some companies to strengthen their business models.

The merger of its retail arm with fellow big six supplier Npower will reduce SSE’s exposure to competitive and regulatory pressures in the retail sector. Meanwhile, Drax is set to diversify its fuel mix through the acquisition of a 2.6GW portfolio of hydro, pumped storage and gas generation assets from Scottish Power.

However, it also forecast negative free cash flow for some companies, with Centrica ramping up its investments and SSE continuing to spend heavily on networks and renewables. Index-linked renewable subsidies and low capital expenditure are expected to allow Drax to retain a positive free cash flow.

Debt levels are predicted to be stable, although Fitch expects SSE’s leverage metrics to worsen as it seeks to maintain higher dividends, despite the reduction in free cash flow. Reduced costs are anticipated to offset the increase in investment at Centrica, whilst Drax is expected to pay down a spike in debt resulting from the Scottish Power deal.

Commenting on the recent suspension of the capacity market, Fitch said the freeze on payments and auctions will have a “temporary negative impact on the cash flows and liquidity of rated scheme participants, potentially lasting several months”. It expects the scheme to be reinstated, with changes to its structure “likely”.

The ratings agency has also changed its outlook for the UK water sector from stable to negative, as the next price control period (AMP7) will include a significant reduction in the allowed weighted average cost of capital, along with tougher cost and performance targets.

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