Water shares soar as watchdog prepares record £88bn funding package

Shares in London-listed water companies soared on Thursday after regulator Ofwat proposed a record £88bn “catch-up package”, funded through a rise in customer bills.

The funding package was announced as the industry grapples with an existential crisis, with water companies facing the threat of renationalisation amid billions of pounds of debt, crumbling infrastructure and a litany of environmental and regulatory failings.

The crisis has seen Thames Water, which has a £15bn debt mountain, warn it only has enough liquidity to fund its operations for another 11 months, and South East Water turn to investors for an emergency cash injection.

Severn Trent and United public services led the FTSE 100 on Thursday afternoon, adding 4.6 and 4.1 per cent respectively, while the owner of South West Water Pennon Group Its shares soared 9.7 percent to the top of the FTSE 250 index.

All three groups welcomed the proposals, but none seemed willing to receive as much funding as they had hoped in their business plans.

Aarin Chiekrie, equity analyst at Hargreaves Lansdown, said: ‘Like a sports team selecting a new player, the water regulator (Ofwat) has selected how much water companies can increase consumers’ water bills between 2025 and 2030.

‘Ofwat has proposed an average annual increase of £19 a year over the next five years, which is a third less than the increases of around £29 a year requested by water companies.

‘These bill increases are necessary to pay for infrastructure improvements, repair broken pipes and deliver cash returns to investors as a reward for funding the company.’

Pennon, who handed boss Susan Davy an £860,000 pay package last year amid a vermin pollution scandal, saw Ofwat recognise South West Water’s business plan as a “leading plan”.

Its Sutton and East Surrey Water business, which was acquired in January, had its plan assessed as “generally good”.

South West Water customers will see their bills rise by £64 on average by 2029-30, to £561. The company wanted average annual customer bills to rise to £596.04 by 2030.

Pennon shares also received a boost from the announcement of a new chief financial officer, Laura Flowerdew, who was previously CFO of Bristol Water.

Severn Trent, which paid boss Liv Garfield £3.2m last year despite rising cases of sewage spills, saw its business plan rated “outstanding”

Severn customers will see their bills rise by £93 on average to £496 in 2030. The company had wanted them to rise to £518 in 2030.

The group also received a boost from a trading update that reported a “strong start” to the year with the company on track to meet its 2024 financial targets.

United Utilities said Ofwat’s proposals are “an important step in the regulatory framework aimed at enabling the delivery of critical investments required to improve the health of the river, strengthen our network and provide better services for customers, communities and the environment.”

Bills for the group’s customers will rise by £94 a year on average until 2030, to £536. United Utilities wanted bills to rise to £556.14.

All three companies will have the opportunity to formally respond to the proposals by 28 August, with Ofwat publishing its final decision on 19 December.

Government ministers will hold urgent talks with water sector chiefs on Thursday to discuss the future of the industry.

Executives from Thames Water, South East Water and Severn Trent are among those summoned to meet Environment Secretary Steve Reed.

Mark Crouch, an analyst at eToro, said: ‘The country’s lack of investment in water infrastructure has become almost a throwaway phrase in recent years, with water companies accused of prioritising profit over safety and quality while operating a form of monopoly given the lack of competition.

“There are growing calls for the new Labour government to nationalise water companies. And while that seems unlikely, it will hopefully act as a powerful incentive for companies to improve their practices.”

Hargreaves Lansdown’s Chiekrie added: ‘The new Labour administration will want to avoid nationalisation but will have to intervene as it is a crucial part of the country’s infrastructure.

“Emergency plans are likely being drawn up to set up a special government arm to run the company if the financial group ends up being pulled out.”