Thames Water says pollution fine limits needed to win over investors

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Thames Water has said it will need regulatory changes including a limit to pollution fines and an increase in permitted returns to persuade shareholders to inject much-needed equity into the debt-laden business.

The utility, which provides water and sewage services to about 25 per cent of the population in England, has asked shareholders, which include sovereign wealth, private equity and pension funds, to inject more than £2.5bn of equity into the business to stabilise its finances. It is also seeking approval from the regulator Ofwat for a 40 per cent increase in customer bills by 2030.

However, in a business plan submitted to Ofwat on Thursday, Thames Water said the equity injections were conditional on the regulator agreeing a “material move up in the allowed rate of return”.

It also said it required an agreement on the “maximum level of penalties we can incur”. Last week it received a £100mn fine for performance failures but it faces other court cases and penalties, which could weigh heavily on profitability. In a statement on Thursday, it said it was “actively discussing the changes with the regulator”.

Thames Water said it would not be able to deliver its £18bn business plan, which covers spending between 2025 and 2030, if it does not receive the equity injection.

The demands highlight the fragile state of Britain’s largest privatised water utility. The company is struggling with higher financing costs on its £16bn debt, as well as a public outcry over sewage overflows and leakage. In June its chief executive Sarah Bentley stepped down amid concerns over the company’s financial stability. The government has drawn up contingency plans for a temporary renationalisation.

Worries have also risen about other UK water companies. More than half of the sector’s estimated £60bn in debt is inflation linked. Although interest rate pressures have reduced slightly in recent months, rating agency S&P has a negative outlook or credit watch on three-quarters of water company ratings.

Thames Water also warned in its business plan that ageing infrastructure such as water pipes and sewage treatment plants were increasingly vulnerable and it was having to spend more on repairs. “This results in less money to invest in improvements,” it added.

The company announced last year that shareholders had pledged £1.5bn, but by March this year it had received only £500mn. In July, it said investors had agreed to stump up £750mn next year, subject to conditions, and that it needed a further £2.5bn from shareholders by 2030.

However, its largest investor, the pension fund Omers, took a 30 per cent write down on its Thames Water stake last year, raising concerns over investors’ willingness to put more cash into the business.

Ofwat said: “Companies have now set out their plans, how they intend to deliver them and the returns they feel their investors should receive. This is the first step of the process and we will now scrutinise and test those plans.”

“We will go through all plans and challenge them individually and comparatively. Our initial view will be published in May/June with a final determination made in December 2024.”

Thames Water said: “Our plans are ambitious and aim to deliver on what our customers have told us are their priorities.”