Higher levels of company gearing are not a problem for the majority of the water sector, with Thames Water being “an outlier”, the chief executive of Severn Trent has said.
Speaking on the back of the company’s interim results for the six months to 30 September, Liv Garfield described the bulk of private equity-backed water firms as ready to inject equity where required to fund the next asset management period (AMP8).
She said: “The only company that is violently keen to not put money in is Thames. Southern are putting in scale money (sic), Wessex and Northumbrian are. There are more companies leaning into it in their business plan. Thames has a unique problem so we need to be better at commenting on Thames being in a uniquely bad position, not the entire sector. It’s a company driven issue, not the whole sector.”
This was disputed by Thames. A spokesperson said the comments made by Garfield are “not correct”.
“We are in a robust financial position and are extremely fortunate to have such supportive shareholders. Our shareholders have already invested £500 million of new funds in 2023. In addition, they have agreed to provide a further £750 million in new equity funding across AMP7. This further funding is subject to satisfaction of certain conditions, including the preparation of a business plan that underpins a more focused turnaround that delivers targeted performance improvements for customers, the environment and other stakeholders over the next three years and is supported by appropriate regulatory arrangements. Our shareholders have also acknowledged the need for additional equity investments indicatively in the region of £2.5 billion in AMP8. In aggregate, this would equate to total equity investment of £3.75 billion, the largest equity support package ever proposed in the UK water sector.”
Garfield added there would be “one or two more in that camp”, but the majority of firms have publicly said they are ready to put equity in.
Severn Trent’s own gearing has remained in a region the company believes is correct, the chief executive explained, which going into AMP8 will be in the mid-60s to 70%, which the company has backed with a multi-AMP financing plan.
Garfield noted that this did not include Severn Trent’s £1 billion equity raise announced on 30 September, one day ahead of PR24 business plan proposals being submitted to the regulator.
She explained the equity raise would be worth another 7-8%, “so we will start the next AMP in a brilliant position”.
Severn Trent reported its gearing at 61.8%, up from 60.7% in March.
By comparison, Thames’ annual performance report in July stated the company’s board considered its financial resilience to be “in a solid position” with gearing down to 77.4%, compared to 81.3% five years ago. At 31 March, the company had access to cash and committed facilities worth £4.4 billion.
Garfield called out companies with a less healthy position as having failed to deliver costs to budget, employed bad financing strategies and failed to put equity in when opportunities arose.
The company’s half year results indicated performance largely inline with expectations with 80% of performance commitments on or ahead of target. Severn Trent anticipates delivering at least £50 million of outcome delivery incentives (ODI) rewards this year, and a total £250 million for the five years to 2025.
An additional reward of between £40 million to £50 million is expected on top of the AMP’s ODI performance.