Thames Water banking on a pipe dream

Maybe they serve something stronger than its own product in the Thames Water boardroom. How else to explain the latest from the debt-laden corporate soap opera? Ofwat has already kyboshed its plans to jack up customer bills by 44 per cent. So, how’s this for a response? How about 59 per cent instead?
Yes, how about that? If the company drowning in £15.2 billion of net debt could refinance itself on unhinged optimism alone maybe it wouldn’t be in such a mess. But, surely, the Thames chairman Sir Adrian Montague and chief executive Chris Weston aren’t really banking on a complete cave-in from the Ofwat boss David Black.
It was only last month that he produced his “draft determination” for the next five-year period to 2030. In it, he cut Thames’s allowed spending to £16.9 billion, rather than the £21.7 billion it sought, and said it could achieve that with a 23 per cent rise in average bills — to £535 a year by 2029/30, not the £627 it had proposed. So, why’s he going to roll over now to even pricier demands from Thames: bills of £696 to fund spending of £23.7 billion? Wouldn’t Black have to resign?
Whatever, that hasn’t stopped Thames from having a go at changing his mind, complete with reams of new data: stuff that rather supports Black’s view that its initial business plan was “incomplete”.
Typically, in the ebb and flow of regulatory settlements, the two parties eventually meet somewhere in the middle. But Thames is trying a different approach. Weston says that, under Black’s draft settlement, which also included an independent monitor, Thames’s plans to fix its leaking, sewage-spilling network “would be neither financeable nor investible and therefore not deliverable”. To boot, it would “prevent the turnaround and recovery of the company”, built on raising £3.25 billion of fresh equity.
On the face of it, too, Thames makes some fair points. Serving 16 million customers in the capital, it has a bigger challenge than rivals of operating in the region with the highest “input costs” and “wages”. Its assets are older too — 79 years versus the sector average of 56 years — on Montague’s maths.
Thames also has a case that Ofwat is being mean in allowing a cost of equity of only 4.8 per cent against the 5.7 per cent it wanted. As it puts it, “a return on equity that sits less than 2.5 per cent above gilt yields and less than 1 per cent above investment grade corporate bond yields” is not “sufficient reward for the risk that shareholders take on as the owner of a water company”.
It’s true, too, that the Brits have long been paying too little for their water, given population growth and climate change, with Montague saying Thames’s average bills have been flat at “around £1 a day” for 20 years when adjusted for inflation. Yet, it’s not true, as Weston claims, that a 59 per cent hike would not be asking customers to “pay twice”.
That’s precisely what it’d amount to. Earlier this month Ofwat fined Thames £104 million for taking customers’ money and then failing to deliver on pledges to stop sewage spills, not least with 157 wastewater treatment works still to fix. Yes, it’s now got newish management. But what guarantee they’ll do better?
Not only that: in calling for a big leap in bills, Thames also looks to be seeking a regulatory bailout for its bondholders. Why should Black allow that? Indeed, Montague’s first task should be to bang heads together British Energy-style and cajole them into a haircut on their debt, so Ofwat could deal with a company with a chance of getting refinanced — not one that’ll run out of cash in May. Only then might Thames’s special pleading wash.
Just the mention of GSK is enough to give some investors heartburn. Who wants to invest in a drugs group facing US litigation over its former blockbuster Zantac, when tens of thousands of Americans are claiming it caused cancer? When the issue surfaced a couple of years ago, Morgan Stanley analysts reckoned GSK could be in for most of a potential $45 billion industry hit, even if the latest Bank of America estimate of “$2 billion to $8 billion” is now about consensus.
Whatever, each court drama is eagerly watched. So, no shock GSK shares rose 2 per cent to £16.51½p on the latest from Delaware: a decision from its Supreme court to allow the group, as well as rivals Pfizer, Sanofi and Boehringer, to appeal a ruling from its lower superior court. It will see them try to overturn an order allowing more than 70,000 plaintiffs to offer expert testimony on the alleged cancer link, without which their cases will fail.
They claim that Zantac’s active ingredient, ranitidine, can degrade into the carcinogen NDMA over time or when exposed to heat. But GSK says that 16 studies since 2019, spanning 1 million patients, show no “reliable evidence” to support that. In December 2022, a Florida court took a similar view. It threw out 50,000 cases after finding so-called experts had heated up ranitidine to temperatures almost three times that of the human body or mixed it with enough salt to “cause death”.
The Delaware superior court cases, spanning nearly all the remaining plaintiffs, will still go ahead pending the appeal. Yet GSK now has a better chance of ending that painful Zantac feeling.
Sixty-two years since he first invested in Berkshire Hathaway and finally the Sage of Omaha has joined the trillionaire’s club. One quirk? He’s got there just when he’s been selling down stocks, including Apple and lately Bank of America, to amass a $277 billion cash pile. Maybe only Warren Buffett gets his equity to go up when he’s telling everyone that, given “what’s going on in the world”, he’s finding cash “quite attractive”.
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