The water companies in England and Wales face significant operational and financial challenges during the 2025-2030 AMP8 investment period, according to a new report from Fitch Ratings on the UK water sector.
To address these challenges, Fitch has adopted conservative cash flow forecasts, modelling a moderate reduction in the sector's debt capacity and highlighting performance outliers.
According to the ratings agency’s special report UK Water in AMP8: Navigating Challenges, the companies will face tightened debt capacity in light of operational and financial hurdles.
Yeshvir Singh, Senior Director at Fitch Ratings said:
“UK water companies face several operational and financial challenges in AMP8. We have reflected the key risks in our conservative cash flow forecasts, while applying a moderate cut to the sector’s debt capacity and clearly identifying performance outliers.”
Fitch is forecasting net cash ODI penalties of £560 million and fines (from the Environment Agency or Ofwat) of about £900 million during AMP8, while applying a moderate cut to sector debt capacity and emphasizing the importance of effective delivery to drive operational improvements.
Fitch has tightened the sector's debt capacity thresholds, reducing net debt to regulated capital value (RCV) by 2% and increasing cash and nominal post-maintenance interest coverage ratios (PMICRs) by 0.1x, while maintaining the regulatory environment assessment at 'a-'.
The ratings agency says this approach reflects the varying business and environmental risks directly in the cash flows, to better reflect variation in the operating models of water companies.
As a result, the cash flow impacts will be more severe for weaker performers and more favourable for stronger ones.
Fitch is warning that AMP8 brings challenges in managing totex performance, price control deliverable (PCD) clawback risks, ODI framework and financing performance. According to the report, the rated portfolio faces a £37.5 billion debt funding requirement. The ratings agency is assuming new equity of around £5.2 billion, with dividend distributions at £5.3 billion.
“UK Water in AMP8: Navigating Challenges” provides insights into Fitch's assumptions for AMP8 forecasts, covering changes in sector debt capacity, treatment of mark-to-market liabilities, totex performance, cost of new debt, average pay-as-you-go and run-off rates, ODIs and inflation assumptions. Fitch also provides updated rating headroom charts.
The forecasts are based on Ofwat’s Final Determinations (FD) - excluding any impact from the Competition and Markets Authority (CMA) outcome for the six companies that have appealed the FD outcome. The CMA decision is expected in 1H26.
Click here for more information and to access the report online
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