While Thames Water dominates headlines with its struggles, United Utilities (UU) and Severn Trent are quietly thriving in the water sector. UU's share price jumped 11% on Thursday, and Severn Trent rose 7%, marking them as standout performers. This surge came despite UU issuing £800 million in new shares, with Australia's Future Fund and Atlas snapping up half the allocation.
Regulatory Settlement Boosts Returns
The rally is driven by Ofwat's 2023 price settlement, which allowed higher bills across England and Wales. For well-run firms like UU and Severn Trent, the settlement proved more generous than expected. UU now targets a 10-11% return on equity in the current five-year period, up from earlier guidance of 8.5% forecast by some analysts. This double-digit return, backed by inflation-linked bills, is highly attractive to investors.
Additional Spending Plans
UU also revealed plans to seek approval from Ofwat for an extra £2.5 billion in spending beyond the agreed £9 billion until 2030. This would fund infrastructure for new homes and datacentres around Manchester. If approved, bills could rise by another £10 per household, and UU's asset base would grow at 10% annually, up from 7%. Such growth prospects explain the share price increase, as utility valuations are heavily tied to asset size.
UU's shares have gained 30% over the past year, outperforming the FTSE 100. Severn Trent also benefited on Thursday, likely on expectations that it too can negotiate similar spending allowances. Both companies now trade at all-time highs, despite the broader water sector crisis.
Implications for the Sector
The divergence between well-run and struggling water firms highlights a key dynamic. While Thames Water faces potential special administration, investors are eager to fund companies like UU and Severn Trent. This suggests that the government's push for a more investor-friendly regulatory framework is working, even as ministers publicly criticise bonuses. Five other water companies appealed Ofwat's bill decisions, mostly securing small adjustments, which effectively endorsed the regulator's approach.
The crisis at Thames has inadvertently benefited UU and Severn Trent, two of only three listed water firms. The regulatory dial has turned further in their favor, offering greater financial rewards. For the government, the lesson is clear: even if Thames collapses, international investors remain keen to support well-managed water companies.
