So much for the idea that the woes of the water sector, and Thames Water in particular, would kill investors’ appetite for all British infrastructure assets. Here comes National Grid, which will probably be the UK’s biggest-spending infrastructure company over the next decade, with a mammoth fundraising that would not be possible if the stink from Thames had infected everything in the vicinity.
National Grid’s near-£7bn rights issue, to back a five-year, £60bn spending programme in the UK and US, is the biggest by a London-listed company since 2009. It is larger than expected and comes before the UK energy regulator, Ofgem, has nailed down the price control regime for the 2026-31 period. Throw in the supposed uncertainties created by Thames, plus a general election, and you might assume the safe option would have been to wait a while.
Instead, the notable feature of Thursday’s announcement is how easily one can raise £7bn when the cash is needed to help fund investment, rather than to repair a broken balance sheet. The rights issue is underwritten and the company will have its money on 12 June. Yes, the shares fell 11% as the market absorbed the dilution from the new equity, but that’s par for the course for this sort of exercise.
Financial markets, one can conclude, are not suffering a general panic about the UK’s regulation of utilities, which is what a few scaremongers in the water industry wanted the outside world to believe. Instead, investors seem to have reached the commonsense conclusion that Thames’s troubles are self-inflicted and isolated. The read-across, as City analysts like to say, to other infrastructure sectors is roughly nil.
Electricity networks are not exactly like water, of course. The regulators are different and electricity comes with a net zero halo as windfarms, solar farms and nuclear stations are plugged into the grid. Yet the tale from water’s contagion merchants was that funding costs could rise across the UK infrastructure landscape if Thames went down the plughole, wiping out its shareholders and (possibly) inflicting some pain on its bondholders. As things currently stand, though, such terrible visions aren’t materialising. Even in the water sector itself, borrowing costs for the better-run companies have only risen modestly during Thames’s public agonies.
That analysis could change when Ofwat, the water regulator, eventually opines on the business plans, bill increases and cost of capital for the next five-year period. (The day was also due to be 12 June, but the election may now cause a delay). Proposals that are seen as “tough” on the companies’ financial returns might indeed affect investors’ appetite to put up capital. But that outcome is probably not the way to bet, as argued in this column previously. Ofwat, like Ofgem, wants to accelerate investment, which means allowing profitable returns on capital.
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The difference with Thames is simply that it is an outlier. Its financial engineering was more extreme and its operational performance more appalling than the rest; no regulator anywhere can be seen to land bill payers with the cost of those mistakes. Thames’s “special case” status seems to be understood by financial markets. If you don’t screw up monumentally, life carries on. The contagion risk for wider UK infrastructure looks minimal.