Ofwat has allowed Portsmouth Water to maintain one Issuer Credit Rating with a single credit ratings agency rather than two – only 10 days after the water company requested the change and less than three months after the licence requirement for two came into effect.

 Portsmouth Water wrote to the regulator on 4 July 2023 seeking Ofwat’s consent for a derogation from the regulatory ring-fencing framework in respect of the company’s licence requirement to maintain Investment Grade Issuer Credit Ratings with at least two credit rating agencies.

The backdated derogation to maintain an Investment Grade Rating from only one credit rating agency - Moody’s - for five years came into effect on 17 May 2023.

Writing to Chris Milner, Chief Financial Officer at Portsmouth Water on 14 July, Andrew Chesworth Interim Senior Director at Ofwat, said:

“In our consideration of the request for consent, we have relied on the information contained in the Consent Request Letter provided to us by Portsmouth Water. The consent provided in this letter is granted on the basis of the information provided by Portsmouth Water and our assessment of the specific circumstances of Portsmouth Water at the time of the request. Accordingly, the consent provided should not be taken as a statement of Ofwat policy as to the provision of consent in other circumstances.”

Setting out the background for Ofwat’s consent in his letter, Andrew Chesworth said:

“The company explains that it considers the cost of maintaining two credit ratings is disproportionate to the benefits it provides in the form of additional information for Ofwat and other stakeholders. Portsmouth Water estimates that the costs to acquire and maintain a second Issuer Credit Rating would be equivalent to £0.40-£0.50 on an average customer bill. In addition, the company states it would require significant senior management time, which it considers would detract focus from delivering the right outcomes for their customers.”

He also pointed out that in the water company’s request to maintain only one Issuer Credit Rating, Portsmouth Water acknowledged that:

“should its consent to the request be provided, Ofwat will have less information available to it and that this may increase the risk of not identifying early, a deterioration in the company’s financial resilience.

“However, Portsmouth Water considers that this risk is low and highlighted several mitigating factors.”

Andrew Cheshworth goes in to point out that there is additional other information that Ofwat can rely on, in the absence of a second Issuer Credit Rating, including:

• the company expects to continue to engage regularly with Ofwat on Havant Thicket project-specific issues:
• going forward, Portsmouth Water will engage with Ofwat through a Joint Planning and Assurance Group (JPAG) that will monitor progress on the delivery of the Havant Thicket project on a monthly basis;
• the company is required to provide Ofwat with additional financial information annually, in relation to the separate Havant Thicket price control;
• the company has offered to share copies of the Investor Report which provides extra information to its investors twice a year, including forward financial projections and credit metrics, with Ofwat

Portsmouth Water has also told the regulator that “it considers that the size of the equity capital committed demonstrates its shareholder’s ability and commitment to ensuring the financial resilience of the business.”

In February 2023 Ofwat announced its final decision confirming that it will allow an increase in totex funding for Portsmouth Water's Havant Thicket Storage Reservoir to £339 million from the £123.6 million first outlined at PR19.

The water company has proposed that the derogation from the licence requirement to maintain a second Issuer Credit Rating should apply for only five years from the effective date of the consent and should only continue to apply for that period if there is no:

• change in the credit rating provider;
• cash lock-up trigger event;
• change of ownership.

Ofwat has also stipulated that there should be is no material change in the rating analysis provided by the Credit Rating Agency that Portsmouth Water currently procures its sole Issuer Credit Rating from - examples include:

• a material deterioration in the company's financial resilience which Ofwat said it will continue to monitor on an ongoing basis;
• a material change to Portsmouth Water's financing structure; or
• a fall in the sole Issuer Credit Rating to a cash lock-up trigger level as defined by its licence

Reasons for consent

Setting out Ofwat’s reasons for consent, Andrew Cheshworth says:

“We consider that the consent provided above should be granted because based on our assessment of the information provided by the company in its letter dated 4 July 2023, we are satisfied that the granting of consent is consistent with our statutory duties. “

In addition, he explains that because Portsmouth Water is the second smallest company as measured by regulatory capital value (RCV), Ofwat considers that:

“If the company's financial position deteriorates, there are likely to be more options to address financial resilience issues compared to the situation where a larger company faces financial distress. As a result, the impact on customers could be more easily kept to a minimum.”

Andrew Cheshworth also points out that the consent “should not be taken as a statement of Ofwat policy as to the provision of consent in other circumstances ... such requests for consent will be considered individually.”