With the potential intervention from the UK government into the Thames Water crisis on the horizon, advisers have warned investors will now be re-assessing their investments in water firms.
On Wednesday, Thames Water announced its chief executive officer Sarah Bentley was stepping down with immediate effect as the water utility company struggles with a £14bn debt pile.
As a result, it was reported that ministers began discussing a temporary nationalisation of Thames Water as investors and the government braced for the potential collapse of the firm.
While initially “shrugging off” the crisis talks surrounding Thames Water yesterday, Susannah Streeter, head of money and market at Hargreaves Lansdown, said that investors are now reassessing the longer-term implications for other firms in the sector.
She said: ”Shares in Severn Trent, Pennon and United Utilities have fallen back more steeply amid the focus on the costs looming for firms which are set to become under increasing pressure to meet environmental targets set by Ofwat.
“Although their immediate financial situation is considered to be more stable compared to other companies, who have been red-flagged by regulators for their high levels of debt and dividend payments, the scale of the mountain to climb in terms of the investment needed is sparking fresh concerns.”
Streeter pointed out that energy firm Bulb went through a similar process when it collapsed in 2021, to which the government is now proposing for Thames Water.
She said: “But Thames Water is a giant in the water industry, supplying 15 million households, and has a customer base 10 times the size of Bulb’s.”
She said that it is likely to prove more difficult to find a buyer for Thames Water, particularly given its £14bn debt load.
She added: “The big question is whether the company’s investors, including overseas pension and sovereign wealth funds, will be willing to stump up a promised financial lifeline of £1bn.
“Pouring more money into the financial black hole Thames Water appears to have dug is clearly an unwelcome prospect, with little hope of future returns given the huge infrastructure work needed to mend leaks and sewage discharges.”
The potential precariousness of other water firms is now being questioned as well.
Streeter pointed out that The Water Services Regulation Authority (Ofwat) has been monitoring Southern Water and Yorkshire Water, as well as Thames Water, given its concerns over their financial resilience.
In its 2022 annual report, it also flagged worries about Northumbrian Water and Portsmouth Water for having fallen far short of expectations when it came to the level of dividends paid given their relative financial resilience.
“It’s no wonder waves of worry are now surrounding more firms who have been caught uptide, as the era of cheap money has been dammed and their debt payments have hurtled upwards,” the regulator stated.
According to the Thames Water website, its external shareholders include Ontario Municipal Employees Retirement System (OMERS), Universities Superannuation Scheme (USS), Infinity Investments SA, British Columbia Investment Management Corporation, Hermes GPE, China Investment Corporation, Queensland Investment Corporation, Aquila GP Inc. and Stichting Pensioenfonds Zorg en Welzijn.
Omers and USS declined to comment about whether they remain committed to investing in Thames Water or how this will affect their returns.
Thames Water, meanwhile, said it “remains focused on delivering for its customers, the environment and stakeholders”.
Thames Water said it received £500m of new funding from its shareholders in March 2023 and that it is “continuing to work constructively with its shareholders in relation to the further equity funding expected to be required to support Thames Water’s turnaround and investment plans.
“Ofwat is being kept fully informed on progress of the company’s turnaround and engagement with shareholders.”
It added that it continues to maintain a “strong liquidity, including £4.4bn of cash and committed funding, as at 31 March 2023”.