Thames knock-on effect hurts listed water firms

Listed water companies are feeling the knock-on effects of Thames Water’s recent uncertainty.

United Utilities, Severn Trent and Pennon are the only listed companies in the sector. In recent weeks, Pennon’s share price has fallen 7.8%, Severn Trent’s has dipped by 9.4% and United Utilities also slid by 8.3%.

Martin Young, utilities analyst at Investec, warned it would be “wrong to tar with the same brush” the whole sector when performance and financial resilience vary across the water industry.

“The fervour around the highly geared and underperforming Thames Water has morphed into a wider debate about regulation and ownership, to the detriment of listed valuations,” Young said.

Each of the listed companies saw a marked fall in share price the days following the resignation of Thames CEO Sarah Bentley on 27 June, which in turn sparked debates around the company’s finances and ownership.

Young said: “They say that you are judged by the company you keep, and it feels that this is very much the case with the water sector, and the well documented travails of Thames Water have split over into a wider debate about the regulation and ownership structure of the sector.”

He said the debate “has become unbalanced” and lost sight that across the industry there is “a marked range of performance in the sector”.

This week the Environment Agency published its annual Environmental Performance Assessment (EPA) of water companies in England that showed many were not meeting standards related to pollution and delivering on environmental commitments.

Young said it highlighted that “not all companies are equal”, with Severn Trent maintaining its top rating with UU, Northumbrian and Wessex close behind while the rest were rated as needing to improve.

This year the agency recalibrated its assessment, which meant even in instances that performance had improved, companies did not necessarily gain higher rating scores.

For 2022 discharge permit compliance became a core metric so companies could not score a top rating without achieving their target. The threshold for total pollution incidents tightened, and will continue to do so over five years to reflect higher environmental expectations. A metric was reintroduced for use and disposal of sludge.

The Environment Agency’s report on performance was broadly scathing, it said “the majority of water companies” were not meeting required environmental standards. However, good performance was maintained or improvements made at some organisations.

Chair of the Environment Agency Alan Lovell described the higher performing companies as being “at the top of a very poor league”.