UK water companies face struggle to raise equity without bill hikes, Moody’s warns

Stay informed with free updates

Simply sign up to the Utilities myFT Digest — delivered directly to your inbox.

Britain’s privatised water companies may struggle to raise billions of pounds of much-needed equity by 2030 unless the regulator agrees to substantial increases in bills, Moody’s has warned.

The rating agency, whose downgrade of Thames Water in July helped to push the utility into a breach of its operating licence, said UK water companies were suffering “diminishing investor confidence” ahead of a crucial regulatory decision on household water bills by the end of 2024.

“Weak operational performance, exacerbated by tough regulatory targets, may make it harder for companies to attract equity investment in the future,” it said in a report published on Tuesday.

The UK’s privatised water companies have come under unprecedented regulatory, financial and political pressure. Chancellor Rachel Reeves said at an investor summit on Monday that it “was clear that more investment was needed” and admitted that “prices are going to go up”.

Although water companies have asked to increase average charges by around 40 per cent per household over the next five years, Ofwat, the sector regulator, has proposed rises of around one-fifth. A final decision is due in December though it may be postponed until early in the new year.

While Ofwat’s final determinations are “typically less onerous” than its draft decisions, the water industry’s “business risk is growing with ongoing public, political and regulatory pressure diminishing investor confidence”, Moody’s warned.

The rating agency has a negative outlook on the industry but said it could change that to stable if Ofwat’s final determination “proves supportive of companies’ investment needs”.

Many companies are “laying the groundwork” for an appeal to the Competition and Markets Authority watchdog “if the risk and return profile is not rebalanced in their favour in Ofwat’s final decision”, Moody’s said.

Dominic Nash, an analyst at Barclays, has previously estimated that water companies need to raise around £10bn of new equity from investors by 2030 to keep services running, achieve lower gearing and deliver crucial infrastructure improvements.

The £10bn includes more than £3bn for Thames Water, £819mn for Anglian Water, £650mn for Southern Water, £437mn for Yorkshire Water and £400mn for Northumbrian Water, according to company plans.

Water UK, the industry lobby group, also said on Tuesday that there was a “material risk [ . . . ] that the sector would be unable to raise the new equity investment required to finance the proposed investment programme for the next five years”.

Oxera, the consultancy, surveyed around 30 investors for the lobby group’s report — including Fidelity, Allianz Global Investors and DWS Asset Management. It accused the regulator of “expecting companies to raise equity to subsidise bills at a cost to future customers”.

The dismal message comes as Thames Water, the largest regional monopoly, races to find at least £1bn in cash to stave off a potential financial collapse before Christmas. Its existing investors — which include Chinese and Abu Dhabi sovereign wealth funds as well as the pension funds Omers and USS — have already refused to inject equity in the business and declared the industry “uninvestable”.

Ofwat on Tuesday appointed LEK Consulting as an independent monitor for Thames Water, charged with keeping a closer watch on the utility until it restores its investment-grade ratings.

Ofwat said: “We have received responses from many organisations, including water companies, customers, environmental and consumer organisations, and investors. Inevitably these reflect a diverse range of views on the proposals we have made.”