Utility Week

Utility Week 25th October

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Page 18 of 31

Finance & Investment This week Severn Trent boss fears capital structure of some companies may not be sustainable High gearing of water firms 'concerning' Tony Ballance, director of strategy and regulation at Severn Trent Water, has expressed concern that the high gearing of some water companies might not be sustainable. Speaking at the Utility Week Congress last week, Ballance Ballance: financeability a 'long-term challenge' called for more action from regulator Ofwat to incentivise equity investment and reduce debt. He said: "Ofwat hasn't really tackled this issue of sustainable financing. We are concerned that there is not enough incentive to reward equity and attract new equity into the sector… There remain some real longterm challenges around financeability." Ballance's comments echo the sentiments of Ofwat chairman Jonson Cox, who said recently that high gearing in the water industry was a "serious concern". According to Ofwat, in the past six years the proportion of equity in the sector has diminished from 42.5 per cent to 30 per cent of regulatory capital value. Several companies are at 80 per cent gearing, so they are obtaining only a fifth of their financing from equity. Ofwat has previously taken the view that the capital structure of the companies is for the boards and shareholders to determine. However, according to Cox: "This remains the case only as long as a structure does not create risks which could, on failure of a company to meet its obligations, pass liability or risk back to customers or to the public purse – or indeed damage the legitimacy of the entire sector." CM Stock watch Water Tunnel finance won't triple Thames' profits Thames Water has hit back at claims its profits could be three times the industry average if it gets the go-ahead for the Thames Tideway Tunnel financing package. A report by Bloomberg New Energy Finance said Thames could deliver an after-tax return on equity of 24 per cent if it was allowed to charge customers an extra £80 a year to cover the costs of the tunnel. That is three times the industry average of 7 per cent, which Bloomberg calculates Thames could deliver by raising bills by £31-35. Thames said the £80-a-year figure Bloomberg has used represents the maximum bill impact, which would only occur in the mid-2020s, and that price rises will be gradual. It will give Ofwat an updated estimate of annual costs in its PR14 bid in December. A spokesman said: "Thames Water, Ofwat and government expects the tunnel to be financed and built by a company separate to Thames with its own licence from Ofwat… Thames Water shareholders will not participate in this company and therefore will not benefit from this arrangement." Last week, Ofwat refused Thames' application for an interim determination lifting Electricite de france share price, 16-22 October Energy Half all guarantees go to energy projects More than half the projects deemed eligible for government infrastructure guarantees are energy projects, the Treasury revealed on Tuesday. Forty projects, worth £33 billion, are now at the prequalification stage for the UK Guarantee programme. The government is prepared to underwrite borrowing of up to £40 billion. These include Helius Energy's 100MW biomass plant at Avonmouth, Islandmagee gas storage in Northern Ireland and two Intergen gas-fired power stations in Lincolnshire and Essex. EDF Energy's Hinkley Point C new nuclear plant had already been named as eligible. Drax is the only company to be awarded a guarantee for biomass conversion, worth £75 million. Danny Alexander, chief secretary to the Treasury, said: "Getting our infrastructure right means we can be globally competitive, boost growth and create jobs. We can see the extent to which the government is reaching out to help the private sector build key infrastructure." Electricite de france share price, 29 July - 22 October 25.9 EDF shares rose this week on the news that the French government-backed utility has secured a deal to build the UK's first new nuclear power station in a generation. The market saw the strike price as favourable to EDF, as was last week's announcement of additional Chinese funding for the project. bills by £8 a year in 2014-15, subject to consultation. Thames had asked for the rise largely to cover the cost of preparations for the tunnel. 26 25.8 25 25.7 24 25.6 23 25.5 22 25.4 25.3 Date Oct 16 21 17 18 21 22 Date Jul 29 Aug 12 26 Sep 09 23 Oct 7 UTILITY WEEK | 25th - 31st October 2013 | 19

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