UK water company Severn Trent to raise £1bn to tackle pollution

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UK water company Severn Trent will raise £1bn through a new share issue to support plans for infrastructure investment to reduce water leakage and cut sewage outflows.

The FTSE 100-listed utility, which provides water and sewage services to 8mn people in areas including the Midlands and Wales, said the share issue would raise £500mn from the Qatar Investment Authority, which already has a 4.59 per cent stake in the company.

A further £500mn will be raised from institutional investors, and up to £7mn from retail investors. An unspecified number of company directors will buy shares worth £275,000 each.

The share issue comes as the industry seeks to combat a reputational and financial crisis that has led to calls for renationalisation of the UK’s privatised water industry.

Severn Trent’s stock rose more than 4 per cent to £23.57 a share on Friday morning. Shares were down 13 per cent this year before the update.

Severn plans to raise the average customer’s bill by almost 37 per cent in the region by the end of the decade to £518, as part of a new five-year spending plan. Water companies are allowed to adjust bills for inflation every year so in real terms the sums would be higher.

Severn will submit its draft business plan to the water industry regulator by Monday, which will decide whether to sign off on water companies’ steep bill increases to pay for investment in infrastructure including reservoirs, water transfer pipes and sewage treatment plants. 

Severn plans to invest £12.9bn over five years from April 2025, almost double the £6.9bn agreed for the regulatory period between 2020 and 2025, with £5bn earmarked for cutting leakage and sewage spills.

The company is targeting a 30 per cent reduction in both spills and storm overflows by 2030. It received a £1.5mn fine for sewage discharges in 2021.

Ofwat is not expected to approve companies’ plans until the end of next year, and will have to balance the need for investment with the impact on customers struggling with a cost of living crisis.

The UK’s privatised water companies have been criticised for amassing £60bn of debt since they were sold in 1989, while paying out more than £72bn in dividends. They have also attracted scrutiny for awarding senior executives generous pay packages, while failing to invest sufficiently in infrastructure, generating calls for renationalisation from campaign groups.

Earlier this year Liv Garfield, chief executive of Severn Trent, emailed other industry chiefs to call for a new task force that would work with the Labour party and head off any future threat of nationalisation.

Garfield is the water sector’s highest-paid executive, receiving a total pay package of £3.2mn in the year to 31 March 2023, down from £3.9mn in the prior period, but still 73 times average employee earnings at the company.

Like other water companies Severn Trent has suffered the impact of rising inflation on energy, construction, labour and financing costs. Its net debt rose from £6.5bn to £7.1bn this year. The company paid a £261.3mn dividend in the year to March 2023.

Severn’s share issuance will help to keep gearing — a measure of indebtedness — at around 65 per cent over the next regulatory period, satisfying Ofwat’s guidance to keep it below 70 per cent.

Equity injections have been rare in the 34 years since the regional water monopolies in England and Wales were privatised. But in the past three years Anglian Water, Southern Water, Thames Water and Yorkshire Water have all received cash from their shareholders as their finances came under pressure. Severn Trent also raised £250mn in equity in 2021.

The company’s share issue will be led by Bank of America Securities and Morgan Stanley, with Citigroup as joint bookrunner and Rothschild as financial adviser.