The water industry in England and Wales has submitted its business plans for the next five-year price control period PR24 to the Water Services Regulation Authority (Ofwat). PR24 starts in April 2025 and ends in March 2030.
Following the intense pressure on the sector to improve the water quality and reduce the environmental impact, the business plans indicate that the water sector aims to increase investments significantly to £96 billion by March 2030. This is nearly double the allowed total expenditure of £51 billion for 2020-2025 and exceeds the aggregated regulatory capital value of the sector today (£94 billion as of March 2023). The regulatory framework allows for these expenditures to be recouped via consumer bills. As a result, proposed bill increases over the five-year period ending in March 2030 are sizeable and will range from 10.5% for SES Water to 66% for Southern Water, excluding inflation (see chart 1). This stands in stark contrast to the previous two price control periods when the focus was on customer bill reduction.
Chart 1
The effect on individual credit profiles from the ramp-up in spending will vary. The expenditure will be predominantly debt-financed. As a result, regulatory gearing, meaning debt to regulated capital value as presented in the business plans, will rise in most cases. This is despite the availability of fresh equity in a handful of cases and even though some companies have received shareholder support to shore up financial resilience in the current price control period. In the case of Thames Water and Northumbrian Water, shareholder contributions will depend on the final regulatory determination and the cost of equity set in the final weighted average cost of capital (WACC). We note that, as per the appointee WACC from Ofwat's final methodology, the equity premium of 154 basis points was lower than the previous final determination of 205 basis points for PR19. Ofwat will announce draft determinations in May or June 2024, with final determinations to follow in December 2024.
The effect on S&P Global Ratings-calculated funds from operations (FFO) and, eventually, on the ratings in the sector will hinge on Ofwat's final determination of companies' returns, total expenditure allowances, the extent to which Ofwat will allow utilities to pass on the increase in investments to customers, and companies' financing mix.
Three-quarters of our ratings in the water sector already have a negative outlook or are on CreditWatch with negative implications (see table 1). In most cases, this is because of inflationary pressure on utilities' operating and financing costs. While inflationary pressure has continued to ease, results for the financial year ended March 31, 2023, confirm that credit metrics across the board remain considerably below our rating thresholds. We will continue to evaluate water companies' draft and final business plans to gauge their effect on the key credit metrics we consider, namely FFO to debt and debt to EBITDA.
Table 1
U.K. water 2025-2030 business plan elements | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Company | Ratings | Total expenditure 2025-2030 (bil. £) | Cumulative proposed average household bill increase over 2025-2030 (%) | Proposed new equity (bil. £) | Forecast debt to regulatory capital value 2030 (%) | Debt to regulatory capital value 2023 (%) | Regulatory capital value as of March 2023 (bil. £) | |||||||||
Water and sewerage companies | ||||||||||||||||
Anglian Water Services Financing PLC |
A-/Negative/-- (senior secured) | 9.0 | 15.5 | -- | 69 | 66 | 10.0 | |||||||||
Yorkshire Water Services Finance Ltd. |
A-/Negative/-- (senior secured), BBB/Negative/-- (consolidated) | 7.8 | 33.4 | -- | 66 | 70 | 8.7 | |||||||||
DWR Cymru (Financing) UK PLC |
A-/Negative/-- (senior secured), BBB/Negative/-- (consolidated) | 3.5 | 25.5 | -- | 61 | 58 | 7.2 | |||||||||
Severn Trent Water Ltd. |
BBB+/Stable/A-2 | 13 | 24 | 1.0 | 66 | 60 | 11.3 | |||||||||
United Utilities Water Ltd. |
BBB+/Stable/-- | 13.7 | 24.5 | -- | 64 | 58 | 13.1 | |||||||||
SW (Finance) I PLC |
BBB+/Negative/-- | 7.8 | 66 | -- | -- | 68 | 6.4 | |||||||||
Northumbrian Water Ltd.§ |
BBB/Stable/-- | 6.0 | 18.5 | 0.400* | 71 | 68 | 5.1 | |||||||||
Thames Water Utilities Finance PLC |
BBB/CW Neg/-- (senior secured), BB+/CW Neg/-- (consolidated) | 18.7 | 40 | 2.5* | -- | 77 | 18.9 | |||||||||
Water only | ||||||||||||||||
Affinity Water Programme Finance Ltd. |
BBB+/Negative/-- (senior secured), BBB-/Negative/-- (consolidated) | 2.12 | 13.2 | 0.15 | 74 | 74 | 1.7 | |||||||||
South Staffordshire Water PLC |
BBB+/Negative/A-2 | 0.819 | 13.5 | -- | -- | 59 | 0.5 | |||||||||
Sutton and East Surrey Water Plc |
BBB/Negative/-- | 0.413 | 10.5 | 0.035 | 70 | 77 | 0.3 | |||||||||
South East Water (Finance) Ltd. |
BBB/Negative/-- | 1.9 | 19.6 | -- | 76 | 74 | 1.7 | |||||||||
*Conditional upon the cost of capital. Bill increases are measured as the increase in the expected bill in 2029-2030 over the expected bill in 2024-2025, in 2022-2023 prices. Sources: S&P Global Ratings, companies’ business plans, Ofwat. |
Related Research
- EMEA Utilities Outlook 2023: United Kingdom: Tailwinds For Energy, Cross-Currents For Water, Jan. 24, 2023
- Industry Top Trends 2023: EMEA Utilities, Jan. 23, 2023
- High Level Of Index-Linked Debt Exacerbates Effect Of Inflation On U.K. Water Companies, Dec. 1, 2022
- Outlook On Yorkshire Water Services Ltd.'s Debt Revised To Negative On Inflationary Pressure, Nov. 28, 2022
- Sutton and East Surrey Water PLC 'BBB' Rating Affirmed; Outlook Remains Negative, Nov. 10, 2022
- U.K. Water Operator South Staffordshire Group Outlook Revised To Negative On Inflationary Pressure, Nov. 3, 2022
- Outlook On U.K. Water Utility Dwr Cymru (Financing) UK PLC's Debt Revised To Negative On Inflationary Pressure, Nov. 1, 2022
- Outlook On U.K. Water Operator Affinity Water Finance PLC Debt Revised To Negative On Inflationary Pressure, Oct. 28, 2022
- Outlook On South East Water (Finance) Ltd.'s Debt Revised To Negative On Increasingly Inflationary Environment, Oct. 27, 2022
- U.K. Water Operator Anglian Water Services Ltd. Outlook Revised To Negative On Inflationary Pressure, Oct. 20, 2022
- United Utilities Water Rating Affirmed At 'BBB+', Parent United Utilities PLC Affirmed At 'BBB'; Outlook Stable, Oct. 13, 2022
- Northumbrian Water Ltd. And Northumbrian Water Group Ltd. Downgraded To 'BBB' From 'BBB+'; Outlook Stable, Oct. 12, 2022
- Severn Trent Water Ltd. 'BBB+' And Parent Company Severn Trent PLC 'BBB' Ratings Affirmed; Outlook Stable, Sept. 30, 2022
- Outlook On Southern Water Services (Finance)'s Debt Revised To Negative On Inflationary Pressure, Sept. 20, 2022
- Issue Ratings On Thames Water Utilities Finance PLC's Class A And B Debt Lowered On Strained Metrics; Outlook Stable, Sept. 16, 2022
- Why We See England And Wales' Water Regulatory Framework As Strong, July 1, 2022
This report does not constitute a rating action.
Primary Credit Analyst: | Aarti Sakhuja, London + 44 20 7176 3715; aarti.sakhuja@spglobal.com |
Secondary Contacts: | Gustav B Rydevik, London + 44 20 7176 1282; gustav.rydevik@spglobal.com |
Julien Bernu, London + 442071767137; Julien.Bernu@spglobal.com | |
Andres Dascoli, London +44 2071766753; andres.dascoli@spglobal.com | |
Research Assistant: | Kimberly Suarez, London |
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