Thames backed to secure future investment

Ratings agency Moody’s has backed Thames Water to secure the future investment that it needs.

With one month until Ofwat is due to publish draft determinations for companies in England and Wales for their 2025-30 business plans, Moody’s said it anticipated Thames would get a settlement it can work with.

“Our expectation is that Thames Water will ultimately be able to secure a regulatory determination that provides a balance of risk and reward that supports future equity injections,” Moody’s latest outlook adds.

Thames’ investors pulled £500 million of previously-committed investment in March, raising concerns about the future of the company.

Earlier this month, Thames Water strategy and external affairs director Cathryn Ross said that current regulatory controls meant the company was “fundamentally not investible”.

Despite this, Moody’s expects Ofwat to approve plans that will attract new investors.

The ratings agency added that it does not believe government will intervene in the regulatory process: “While the regulator acts independently, political intervention cannot be ruled out, given the strong public interest in Thames Water; however, this is not our base case assumption.”

More broadly, Moody’s said that negative public perceptions of the water sector could be deterring international investors, despite the UK performing equally compared with other parts of the world.

It said this negativity may increase pressure on government and regulators to change established frameworks to “set potentially unachievable targets”.

This, Moody’s suggested, “could make the sector less attractive to investors ahead of its largest investment programme since privatisation”.

However, it added that the UK water industry is “doing no better or worse than companies elsewhere” on leakage and wastewater treatment.

Moody’s highlighted potential investment risks, which included the net penalties accumulated by water companies during the current asset management period of £142 million.

Moody’s outlook adds: “AMP8 targets that assume a substantial further improvement in performance will increase the risk of future penalties, particularly for companies that are already failing to achieve current targets.

“This risk may be exacerbated by cuts to totex allowances and higher execution and delivery risk associated with a much larger investment programme.”

Investor appetite to provide funding, Moody’s said, could be dented by the potential for higher penalties as well as returns that do not adequately compensate them for risks incurred.

Moody’s said a regulatory regime that balances risk and return is “even more relevant” at the moment because of the sizeable amounts of new funding the sector needs.

“The cost of capital may increase in the face of perceived uncertainty. If the sector cannot raise new equity as required, credit quality will be at risk and debt funding may not be forthcoming.”

Water companies’ have collectively proposed spending more than £100 billion between 2025-30 in their updated PR24 business plans.

Ofwat will make its draft determination on those plans on 12 June.