Thames Can’t Get £2.5 Billion It Needs Unless Rules Change

Thames Water Plc said its £18.7 billion ($22.7 billion) plan to strengthen its finances won’t get funding from investors unless the regulator changes the rules to allow fatter returns.

(Bloomberg) — Thames Water Plc said its £18.7 billion ($22.7 billion) plan to strengthen its finances won’t get funding from investors unless the regulator changes the rules to allow fatter returns.

The UK’s largest water company said delivering on its full business plan, published belatedly on Thursday, rests on getting £2.5 billion additional equity from shareholders for 2025 to 2030. However, it warned that investors can get better returns in UK gilts and investment grade corporate bonds. It called on the Water Services Regulation Authority, Ofwat, to make significant changes to the rate of returns allowed for regulated water companies.

Thames said shareholders have agreed to give an additional £750 million for its turnaround plan until 2025, and it’s seeking another £2.5 billion for the second half of the decade. Even with that money, it scaled back its ambitions on cleaning up the environment.

Unless equity returns are raised from the 6.5% proposed by Ofwat toward 7.8%, which maybe be more attactive to investors, “Thames will again face questions over its ability to finance,” said Paul Vickars, senior credit analyst at Bloomberg Intelligence.

Thames Water called for a “material move up in the allowed rate of return” set by Ofwat in its initial guidance. In addition, it said no external dividends would be paid until at least 2030. Almost 70% of its planned expenditure will come from bill payers who will shell out about 40% more for services from the utility up until the end of 2030.  

The utility has been at the center of a crisis that’s roiled the industry this year as calls from the public and politicians to stop releasing sewage into waterways coincided with soaring debt costs. In June, Sarah Bentley suddenly stepped down as chief executive over financial stability concerns, leading to talks with government officials about a temporary nationalization. 

Ofwat, the water regulator, issued early guidance for estimating the cost of capital in December 2022 and asked water companies to use this framework when calculating the allowed return for the five years through 2030.

It has also said companies should aim to maintain an equal debt to equity ratio in the sector. But Thames said it was unlikely to achieve this going into the next price review period. At the end of March, Thames Water had the highest debt to equity ratio in the sector at more than 80%, according to a note from Martin Young, an analyst at Investec.

The company also called on Ofwat to soften rules around penalties, which sees customers reimbursed for poor performance by water providers, including pollution spills. In July, the government changed the rules so that polluting companies can face unlimited fines.

Thames was named last week as the industry’s worst performer by Ofwat, which imposed a penalty of more than £100 million because of a failure to meet delivery targets, on everything from leakages to sewage spills.

Thames has also faced criticism from analysts for failing to publish its full Price Review 2024 plan by Ofwat’s Oct. 2 deadline. Even on Thursday, there was frustration that a key document was missing detailing how the company would align risk and return.

“The fact that three days on, that there still appear to be gaps in what is accessible is disappointing and arguably unhelpful as collectively the water sector endeavors to reset,” Young said.

(Updates with analyst comment from fourth paragraph.)

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