- Shares have been out of favour
- Ofwat ruling seen as positive
- Thames Water in special measures
Having lagged the market all this year, water utilities were the star turn following an announcement from the regulator Ofwat that the firms could raise their bills over the next five years.
In the FTSE 100, Severn Trent (SVT) gained 66p or 2.5% to £26.85 and United Utilities (UU.) added 25p or 2.3% to £10.91 taking both stocks into positive territory for the year, albeit marginally.
In the FTSE 250, shares in Pennon (PNN) jumped 44p or 7% to 663p, trimming their loss for the year to 16%.
CLEANING UP THEIR ACT
The UK water watchdog Ofwat said average water bills in England and Wales would rise by an average of £19 per year or a total of £94 over next five years, which was a third less than the water companies had asked for but better than analysts had expected.
The price rises are part of Ofwat’s record £88 billion programme to upgrade to the UK’s water infrastructure ‘to deliver cleaner rivers and seas and better services for customers’.
Of the total figure, £35 billion is directed at reducing pollution with £10 billion set aside especially to tackle storm overflows in order to reduce spills by 44% from 2021 levels.
Ofwat chief executive David Black said: ‘Customers want to see radical change in the way water companies care for the environment. Our draft decisions on company plans approve a tripling of investment to make sustained improvement to customer service and the environment at a fair price for customers.’
Black added: ‘Today’s announcement also increases the resilience of our water supplies to the impact of climate change and will reduce how much water is taken from rivers by enabling a range of long-term water supply projects, which includes plans for 9 reservoirs.’
Ofwat warned the companies they would be closely scrutinised to make sure they deliver on their plans and will be held to account if they don’t show a real improvement both on an environmental level and in terms of service to customers.
Also, investment funding will be ring-fenced with a claw-back guarantee so that any money not spent by the water companies will be returned to customers not pocketed by the owners and paid out in dividends.
SUPPORT FOR THAMES
One of the weakest companies in the sector is privately-owned Thames Water, which had asked for bills to be raised by £191 by 2030 but has been told it can only raise them by £99 over the period.
Ofwat has allowed Thames around £17 billion to invest, of which £3.3 billion is conditional on the company being able to show it is ‘ready and able’ to effectively deploy the funds.
Moreover, Thames has been placed in a ‘turnaround oversight regime’, meaning it will be more closely monitored than the rest of the sector in terms of hitting its targets.
There have long been concerns that Thames could run out of money – its capital structure is mostly long-term debt underneath which is a thin sliver of equity, and the company only has enough cash to last until next May.
If the company can’t raise fresh funding and the support from Ofwat isn’t enough, it will be put into special administration which is the equivalent of temporary nationalisation.
