Four water companies have been downgraded by global credit ratings agency S&P after accepting their final determination from Ofwat.
Affinity, SES, United Utilities and Wessex were all lowered by one notch but all remain“stable”, according to S&P.
In a ratings report, the agency noted the companies’ decision to appeal reflected the feeling that the determination from the regulator limited their ability to meet the challenges of the next five years with the funding Ofwat had allowed for investment. S&P also recognised that the determinations may not “adequately capture customers’ priorities”.
On Anglian, S&P said: “If, based on the CMA’s conclusions, Anglian’s operating conditions do not improve significantly, we currently believe Anglian’s credit metrics will remain below the range commensurate with the ratings during AMP7.”
It said Northumbrian’s steep bill reduction contributed to the company’s deterioration in credit quality as well as the sector wide reduction in allowed cost of capital of 1.96 per cent and challenging performance targets.
S&P said these factors suggest Northumbrian is unlikely to significantly outperform on its future cost allowances. It added that the support of Northumbrian’s parent company was likely to be reflected in the dividend payment, but S&P did not feel that was sufficient to keep metrics the same as current credit ratings.
Meanwhile Yorkshire, which is also appealing to the CMA, was revised to negative from stable because S&P believed the final determination “exacerbates downside risks”.
S&P said its current base case for Yorkshire did not assume material changes on operating conditions in AMP7, based on the outcome of the CMA review.
It anticipated Yorkshire would incur performance penalties and saw limited potential for the company to outperform on its future cost allowances because of the difference between Yorkshire’s and Ofwat’s estimate of efficient costs.
Elsewhere S&P reaffirmed ratings for South East, South Staffs, Southern, Portsmouth, Thames and Severn Trent after all accepted the terms set out in their final determinations.
The agency said that despite the increased pressure on water companies from regulation, the sector still benefits from a view of low country risk and a strong regulatory advantage.
“We believe the regulator, through its final determination for the next regulatory period, aims to re-balance the interests of stakeholders toward consumers and away from financiers. Yet we think the sector will generally retain good access to capital. We also consider the sector’s long and stable track record of independent regulation that allows for the full recovery of operating, capital, and financing costs, alongside strong ring-fencing conditions.”