S&P Global Ratings are warning that the credit quality of UK utilities, including the water companies, is under pressure – they could face tighter financial ratios and potentially lower credit ratings as a result of increased regulatory pressures.

According to the ratings agency, the utilities are feeling the heat as regulators bear down on them in response to political pressure for lower prices, improved service quality and higher environmental standards.

With regulatory reviews, Brexit and political scrutiny over tariffs and service quality, U.K. water and energy utilities are facing a number of threats to their credit quality.

S&P ‘s latest report U.K. Utilities Are Feeling The Heat says that seven out of 14 ratings on the U.K. water companies carry a negative outlook, reflecting a peak in regulatory reset risk with the next five year regulatory period beginning in April 2020. This will mean lower returns and a sharp focus on operational performance.

The ratings analyst said the methodology for the PR19 Price Review reduces water companies’ allowed cost of capital from a real 3.4% to a real 2.3%, which will likely lead to an average 3% decrease in revenue from March 2020-March 2021. S&P are also predicting that capex will simultaneously rise by about 10%. The agency believes the worst performers in the sector will suffer as a result.

Talk of renationalising U.K. utilities by the Labour Party, is also adding further uncertainty – however, this does not form part of S&P’s base case. The agency said such a change could be “costly to the country “ and its impact on ratings would depend on how supportive S7P would view public ownership.

S&P said it will be in a position to form a view about the issuer credit ratings of each water company between now and March 31, 2020 when the next regulatory period will begin.