There was a stark reminder for the City of the risks and rewards on offer to investors in water utilities on Wednesday, from two of the industry’s biggest names.
One of them, Thames Water, was reported to be eyeing a return to the London Stock Exchange after a disastrous spell in private hands loaded it with debt and left it on the brink of financial collapse.
The other, Pennon, announced a return to profitability and repeated an apology for an incident with contaminated water supply in 2024, for which its South West Water unit was slapped with a fine of almost £2m earlier this year.
The fortunes of both firms offered fresh insight into the sector’s attempts to clean up its tainted reputation with investors and consumers alike.
A report about Thames’ latest attempt to stave off nationalisation said the 16m-customer firm was eyeing a return to life as a public company, potentially refloating shares early next decade. Under its current financial arrangements, Thames is expected to run out of cash in October.
According to the Financial Times, Thames’ latest plan will put control of the firm into the hands of its senior bondholders, including the hedge fund Elliott Management and Apollo Global, the private equity firm.
The deal will leave Thames facing costs of almost £750m, including payments to bankers and lawyers, as well as dues to the creditors themselves. There would also be an estimated £286mn in accrued interest, the paper said.
There would also be a landmark moment under the reported terms of the plan: a public stock market listing for Thames, with a floatation early next decade.
If so, it would mark the end of a 25-year period off the stock market, during which the biggest firm in the sector was loaded with debt, while it continued to struggle with leaking water mains and sewage outflows into open rivers.
Pennon in back profit
Meanwhile Pennon hailed a return of its own on Wednesday: to profit for the year to the end of March, of £135.1m, from a loss of £35.1m last time.
The FTSE 250 constituent and owner of South West Water also repeated an “unreserved apology” for a contaminated supply in Devon, for which it was hit with a fine of almost £2m earlier this month.
Cryptosporidium parasites entered the pipes in May 2024. The incident left around 140 people ill, with sickness and diarrhoea. There were four hospitalisations. People in around 16,000 homes in Brixham in Devon had to boil drinking water throughout the 54-day incident.
In the court case which ended with the fine, Judge Stuart Smith told of “wide-ranging and profound” harm caused by the incident, and that the monitoring systems were “inadequate”, causing a “a major public health incident”.
Pennon’s new chief executive, Keith Haslett, said his “key priorities” included “operational excellence”. He added:
“There is more work to do, and improving operational discipline and capital delivery will be important to meet the commitments we have made and the standards we aspire to achieve”.
City experts were keeping a close eye on the same area, as well as financial metrics.
Duncan Ferris, investment writer at Freetrade, said: “Scrutiny is high, and consumer trust is low. From both a civic and pragmatic standpoint, Pennon needs to keep its business clean.
“Continued investment and operational discipline are key to turning perceptions around and earning more leeway from regulators”.
He added: “Pennon may have returned to profitability, but consistency is the key to its continued good health.”
Pennon’s stock was down by over three per cent at 491p.
According to Adam Vettese, market analyst for Etoro, the share price reaction “tells you everything about where investor focus lies right now”.
He continued: “Keith Haslett’s call for a sharper performance culture only reinforced the message that operational delivery, not just the profit and loss, remains the key risk.”
Thames – Flowing back to the FTSE?
For Thames Water, any return to the London Stock Market would be a landmark moment after a turbulent history in the hands of private equity.
It was privatised in 1989, when one of the highest profile moments in Margret Thatcher’s reform floated it on the London Stock Exchange.
Thames delisted in 2001 after a £4.3bn takeover by the German utility RWE.
In 2006, RWE sold Thames to a consortium called Kemble Water Holdings led by Macquarie Bank. The Australian financier was the main owner for the next 11 years, during which time Thames paid out almost £3bn in dividends to its parent. The payouts were funded in part by borrowing taken out against Thames’ assets.
Macquarie went on to reduce its stake in Thames’ holding company, and by 2017 had sold out to OMERS, a Canadian pension fund, and the Kuwait Investment Authority.
Thames, based in Reading, has been struggling with a debt pile of almost £20bn for the last two years, enough to take it to the brink of collapse.
City doubts- and a wider warning
In the City, there were doubts about the potential appeal of any future share issue from Thames. “It may be a hard sell for investors given [Thames’] difficult history,” said Dan Coatsworth, head of markets at broker AJ Bell.
“The company made the water utilities sector’s name mud with the public, investors, regulators and politicians. The latest reporting suggests a significant outlay will be required to get a creditor-backed takeover of Thames Water off the ground. The deadline is ticking.”
Alongside the announcement of the enforcement measures taken over Pennon, Ofwat’s Lynn Parker, senior director for enforcement, issued a wider warning, which rang out over the sector: “Water companies should be in no doubt that they will be held to account if they fail to meet their legal obligations to customers and the environment.”
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