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UPDATE: UK water companies respond to Ofwat investment plan

19th Dec 2024 12:24

(Alliance News) - Shares in UK listed water companies edged upwards on Thursday after UK water regulator Ofwat gave the green light to a substantial industry investment package.

In its 2024 price review final determinations for the period 2025 to 2030, the regulator approved a GBP104 billion upgrade so water companies can improve their environmental record and services to customers.

Under the final determinations, the regulator increased the allowed rate of return for the water sector to 4.03% from the 3.72% indicated in its draft determinations, with Ofwat noting levels are set to provide a "reasonable return for the risks that investors face for their investment".

The updated rate reflects a 5.1% cost of equity and debt of 3.15%, with this underpinned by a gearing ratio of 55%.

To finance this "essential investment programme", Ofwat said bills in England and Wales will increase on average by 36% in total before inflation between now and and 2030, which works out to GBP31 per year. This compares with the GBP39 requested by firms in August.

For 2025-2026, the average bill will increase by 20%, or GBP86, excluding inflation, followed by smaller increases in the remaining four years.

Following the review, shares in United Utilities Group PLC ticked up by 0.8% to 1,072.00 pence on Thursday afternoon in London, giving the firm a market capitalisation of GBP7.31 billion.

Under the final determination, its average bills for 2029-2030 are set to increase by 32% to GBP585 from GBP442 in 2024-2025.

In response, Warrington, England-based United Utilities said it will take time to review the documentation in depth, noting that it has until February 18 to respond.

Shares in Severn Trent PLC rose 1.8% to 2,597.00p, bringing its market value up to GBP7.79 billion, as its bills are set to rise 46% over the same period to GBP583 from GBP398.

Coventry, England-based Severn Trent welcomed the Ofwat publication, highlighting the GBP3.1 billion increase in total expenditure to GBP14.9 billion from the draft determination for the firm. It added that it expects to generate real regulatory capital value growth of 45% across the asset management periods.

Severn Trent said it is "carefully considering the final determination" and will provide a further market update in 2025.

Shares in Pennon Group PLC, which owns South West Water and Sutton & East Surrey Water, climbed 3.1% to 603.50 pence on Thursday afternoon in London, with South West Water's bills set to rise by 23% to GBP610 from GBP497.

The Exeter, England-based firm's market capitalisation sits at GBP1.73 billion.

Pennon said Ofwat continues to recognise South West Water's "outstanding value" through the 0.3% uplift to its cost of capital, adding that SES will benefit from a 0.05% uplift due to a "good plan". Pennon also noted the February response date and said it is reviewing the detailed documentation.

Reading-based Thames Water Utilities Ltd, whose average bill is set to rise by 35% to GBP588 in 2029-2030 from GBP436, responded in similar fashion, noting that it will review the documentation and provide a response in due course.

Separately on Thursday, Thames Water was fined GBP18.2 million by the regulator for the payment of "unjustified" dividends to shareholders. Thames Water isn't publicly listed.

Ofwat said the water sector investment funding will be subject to a claw back mechanism, whereby if firms fail to spend as designated, money is returned to customers through lower bills.

Ofwat Chief Executive David Black said: "Today marks a significant moment. It provides water companies with an opportunity to regain customers' trust by using this GBP104 billion upgrade to turn around their environmental record and improve services to customers.

"Water companies now need to rise to this challenge, customers will rightly expect them to show they can deliver significant improvement over time to justify the increase in bills.

"We will monitor and hold companies to account on their investment programmes and improvements."

By Christopher Ward, Alliance News reporter

Comments and questions to [email protected]

Copyright 2024 Alliance News Ltd. All Rights Reserved

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