Thames Water: To attract investors, pollution fines must be limited

Thames Water said that it would need to make regulatory changes, including a limit on pollution fines as well as an increase in allowed returns, to convince shareholders to inject the much-needed equity to the debt-laden company.

To stabilize its finances, the utility has asked investors, including sovereign wealth funds, pension funds and private equity firms, to inject over £2.5bn in equity. The utility is also asking the regulator Ofwat to approve a 40% increase in bills for customers by 2030.

Thames Water stated that the equity injections would be conditional upon the regulator agreeing to a “material increase in the permitted rate of return”.

The company also stated that it needed an agreement regarding the “maximum amount of penalties” we could incur. It received a £100mn penalty last week for failures in performance, but faces court cases and other penalties that could have a heavy impact on profitability. It said in a press release that it was “actively negotiating the changes with regulator”.

Thames Water has said that without the equity injection, it will not be able deliver its £18bn (£18m) business plan. This covers expenditures between 2025 and 3030.

These demands show the fragility of Britain’s largest privatised utility. The company faces higher financing costs for its £16bn in debt as well as public protests over sewage leaks and overflows. Sarah Bentley, the chief executive of the company, resigned in June amid concerns about its financial stability. The government has prepared contingency plans in case of a temporary renationalisation.

Concerns have also grown about the other UK water companies. Over half of the estimated £60bn debt for this sector is linked to inflation. S&P’s rating agency has a negative outlook on the ratings of three quarters of water companies, despite a slight reduction in interest rate pressures over recent months.

Thames Water warned in its Business Plan that the infrastructure, such as water pipes and treatment plants for sewage, was aging and vulnerable. It would have to spend more money on repairs. This means that there is less money available to invest in improvements.

In March of this year, the company reported that it received only £500mn from shareholders. In July, the company announced that investors had agreed to contribute £750mn in next year subject to certain conditions. It also said it required a further £2.5bn by shareholders.

The pension fund Omers was its largest shareholder, and it wrote down its Thames Water stake by 30% last year. This raised concerns about investors’ willingness or inability to invest more money into the company.

Ofwat stated: “Companies now have laid out their plans and how they plan to deliver them, as well as the return they believe their investors should get.” This is just the beginning of the process. We will now examine and test these plans.

“We will review all plans and compare them. The initial assessment will be made public in May/June, with the final decision being made in December 2024.

Thames Water stated: “Our plans aim to deliver what our customers told us were their priorities.”

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