29 June 2023
If you are covering the financial issues at Thames Water and what it means for the rest of the UK’s water network, please find below a comment from Tom Gilbey, equity research analyst at Quilter Cheviot:
“The problems facing Thames Water have put a spotlight on the UK’s water infrastructure and the other players in this space, with fears that this will not be the last of the strife in the sector. Ultimately, Thames Water is a case in point of what has gone wrong in the UK water industry since privatisation, and it is going to take a lot to help drag it out of the drains and back on an even keel.
“Thames Water is not alone in struggling. This episode brings further scrutiny on the reputation of the sector and it will likely not recover for some time. The UK water companies have underinvested in the infrastructure at the same time as taking on more debt – though Thames Water seems to have done this more so than others. Some, such as Severn Trent and United Utilities, appear to be in better shape, with less debt on the books, while also achieving good environmental performance ratings. Others are in a less ideal place, with the likes of Northumbrian Water and Yorkshire Water having gearing levels (the amount of debt in the business) only slightly lower than that of Thames Water. Furthermore, the credit ratings and earnings of many of these firms are at a similar point as Thames Water, so one likely scenario is this is not the last expected collapse.
“Unfortunately, there appears to have been a focus on paying out dividends rather than ensuring the quality of the system is upheld – six of the 10 water companies were named in Ofwat’s sewage treatment investigation. With investment so desperately needed, these water companies find themselves in a tricky situation, where more needs to be done but likely not much will be achieved due to the high debt loads and the need to pay the interest. This will result in government support being needed and the taxpayer footing the bill potentially in the form of higher water bills. Thames Water was not an outlier in the industry and won’t be the last issue we hear of. The government may need to act quickly, but this is once again showing cracks in critical infrastructure here in the UK.”
