2nd Oct 2023 10:40
(Alliance News) - Following the Thames Water debacle in the summer, the latest round of business plans from water utilities had the potential to be a damp squib, though investor response has been positive.
United Utilities Group PLC, Severn Trent PLC and Pennon Group PLC set out plans on Friday and Monday to largely rave reviews from stock market investors.
Severn Trent shares were up 0.9% on Monday morning in London, building on Friday's 4.4% advance. United Utilities climbed 1.8% and Pennon rose 2.7%.
After Severn Trent, which supplies water across the Midlands and Wales, outlined its plan for GBP12.9 billion in spending across the five-year period on Friday, it was the turn of United and Pennon on Monday.
United Utilities, which supplies water and wastewater services in North West England, outlined a "hugely ambitious" plan for GBP13.7 billion in total expenditure across the period. The plans will support 30,000 jobs, of which 7,000 are new, United said.
The plan aims to safeguard supplies for three million households, and reduce combined sewer overflows by 60% in the decade to 2030. It also targets a 25% improvement in avoiding pollution incidents across the five-year period.
Hargreaves Lansdown Aarin Chiekrie says: "But all this begs the question of where the money's coming from. It looks like GBP1.35 billion of the cash will come from issuing new equity shares, which will have the effect of watering down existing shareholders' ownership in the company. Just shy of GBP4 billion will come from issuing debt and this should keep the group's gearing level at around 63%, towards the top of the group's target range. This might cause some issues and uncertainty for investors in the short term. But today's investment plan will increase United Utilities regulatory asset base by around 50%. Given that the revenue United Utilities is allowed to earn is based on this figure, it should help bring cash in the door over the long term."
Pennon Group's South West Water also submitted its five-year business plan to the regulator. It comprised a GBP2.8 billion package of capital investments, which will target storm overflows and pollution, water quality and resilience, delivering net zero and environmental gains, and keeping bills affordable for customers.
"Our robust balance sheet underpins our ambition," said Chief Executive Officer Susan Davy.
On Friday, Severn Trent, which supplies water across the Midlands and Wales, outlined its plan for GBP12.9 billion in spending across the five-year period.
The plan includes GBP5.0 billion of investment focused on enhancing capacity and service beyond current levels.
Severn Trent said it would be a "sustainability-led" plan including a 30% reduction in storm overflow spills, a 30% reduction in pollution, and a 16% reduction in leakage.
In order to approach the investment plan from a "robust position", it had raised GBP1 billion in an equity issue. Half of this was raised through an investment from Qatar Investment Authority, the sovereign wealth fund of Qatar.
AJ Bell analyst Russ Mould commented: "Unlike Severn Trent, which announced a GBP1 billion fundraise, controversially shutting out retail investors to a large degree, Pennon and United Utilities have not announced immediate share placings. However, United Utilities has made it clear there will be an equity component as it looks to fund its spending plans.
"The problem the utilities face is that the costs of borrowing have gone up significantly and this makes the juggle between rewarding shareholders, funding investment and keeping a lid on bills a difficult one. Households will absorb a lot of the pain but investors will have to take their share too."
By Eric Cunha, Alliance News news editor
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