The financial future of Britain’s biggest water firm, Thames Water, looks increasingly uncertain in the wake of new pricing and spending limits laid out by regulator Ofwat, according to investment bank JPMorgan.
Britain’s regulator told water companies last week they needed to fix leaks and cut sewage spills without raising bills as much as they had wanted, as a mounting financial crisis in the sector poses a test for Britain’s new Labour government which has pledged to reform the industry.
Analysts at JPMorgan said they were concerned that Ofwat’s tough stance on financial resilience may increase balance sheet risks in the U.K. water sector and that Thames was now facing particular risks.
“Overall, our level of concern about Thames Water’s financial position is at new highs, and we are unsure if Thames’ situation can be resolved without a disruptive outcome for creditors,” they wrote in a note published on Monday.
Britain’s water industry has been in the firing line over the amount of sewage dumped in its rivers and seas, with critics saying the companies have underinvested for decades while taking out billions of pounds in dividends, piling up debt and paying large bonuses to executives.
JPMorgan described Ofwat’s ruling that Thames should raise customer bills by 23 per cent rather than the 39 per cent it had been asking for, and that it should increase its total expenditure by far less than it had requested, was “broadly unfavourable”.
It means the firm must now make “material revisions to its business plan, adjusting spending based on lower revenue recovery and slower asset base growth”.
More broadly it needs to address what Ofwat described as an “inadequate” business plan rating, which ultimately drove the regulator to put Thames into a special ‘turnaround oversight regime’ (TOR).
For Thames to exit the regime it must demonstrate major improvements in operational and financial performance.
To help achieve this, Ofwat is suggesting that Thames consider: (i) a stock market listing, or (ii) a corporate split into two or more companies.
“Needless to say, the implications of Thames being in a TOR are materially negative,” JPMorgan’s analysts said, describing it as “overly intrusive regulation” likely to add to the company’s pressures.
“We think its unlikely that Thames can exit the TOR naturally, meaning extreme outcomes like splitting the company are more likely,” they said.