There was a stark reminder for the City of the risks and rewards on offer to investors in water utilities on Wednesday, from two of the industry’s biggest names.

One of them, Thames Water, is eyeing a return to the London Stock Exchange after a disastrous spell in private hands loaded it with debt and left it on the brink of financial collapse.

The other, Pennon, announced a return to profitability and repeated an apology for an incident with contaminated water supply in 2024, for which its South West Water unit was slapped with a fine of almost £2m earlier this year.

The fortunes of both firms offered fresh insight into the sector’s attempts to clean up its tainted reputation with investors and consumers alike.

A group of Thames’ creditors, represented by London & Valley Water Consortium, is preparing a deal to take control of the firm. 

Under its current financial arrangements, Thames is expected to run out of cash in October. 

The latest attempt to stave off nationalisation would lead the 16m-customer business back toward the London Stock Exchange. 

Any such re-listing would be a landmark moment for Thames Water and the industry. 

It could come as soon as 2030, after a wider restructuring of the company’s finances. The full details are yet to emerge. But industry sources expect the terms of the plan to wipeout existing shareholders, erasing equity  holdings estimated to be worth about £5bn. Creditors would write off over £9bn. No dividends would be taken until after Thames is safely returned to the stock market.

If so, it would mark the end of a 25-year period in private hands, during which the biggest firm in the sector was loaded with debt, while it continued to struggle with leaking water mains and sewage outflows into open rivers.

Industry sources indicate that the creditors’ plan would include billions in funding for service and infrastructure improvements, without increasing bills. 

The move would avoid a forced sale of the Thames back to the taxpayer, keeping the overhaul’s funding  in private hands and protecting the public purse. 

The creditors’ group includes hedge fund Elliott Management and Apollo Global, the private equity firm.

 A spokesman for it said: “Creating further delay and transferring risk to the taxpayer with special administration or nationalisation is not the right answer. 

“It will only restart the process of fixing Thames Water, require billions of pounds of government financial support, increase uncertainty for employees, put pensions at risk, destabilise the supply chain, and make it harder to deliver the improvements customers deserve.”

The deal was first revealed by the Financial Times. It reported that the plan would leave Thames facing costs of almost £750m, including payments to bankers and lawyers, as well as dues to the creditors themselves. There would also be an estimated £286mn in accrued interest, the paper said.

Pennon back in profit

Meanwhile Pennon hailed a return of its own on Wednesday: to profit for the year to the end of March, of £135.1m, from a loss of £35.1m last time.

The FTSE 250 constituent and owner of South West Water also repeated an “unreserved apology” for a contaminated supply in Devon, for which it was hit with a fine of almost £2m earlier this month.

Cryptosporidium parasites entered the pipes in May 2024. The incident left around 140 people ill, with sickness and diarrhoea. There were four hospitalisations. People in around 16,000 homes in Brixham in Devon had to boil drinking water throughout the 54-day incident.

In the court case which ended with the fine, Judge Stuart Smith told of “wide-ranging and profound” harm caused by the incident, and that the monitoring systems were “inadequate”, causing a “a major public health incident”.

Pennon’s new chief executive, Keith Haslett, said his “key priorities” included “operational excellence”. He added: “There is more work to do, and improving operational discipline and capital delivery will be important to meet the commitments we have made and the standards we aspire to achieve”.

City experts were keeping a close eye on the same area, as well as financial metrics.

Duncan Ferris, investment writer at Freetrade, said: “Scrutiny is high, and consumer trust is low. From both a civic and pragmatic standpoint, Pennon needs to keep its business clean. 

“Continued investment and operational discipline are key to turning perceptions around and earning more leeway from regulators”.

He added: “Pennon may have returned to profitability, but consistency is the key to its continued good health.”

Pennon’s stock was down by over three per cent at 491p.

According to Adam Vettese, market analyst for Etoro, the share price reaction “tells you everything about where investor focus lies right now”.

He continued: “Keith Haslett’s call for a sharper performance culture only reinforced the message that operational delivery, not just the profit and loss, remains the key risk.”

Thames – Flowing back to the FTSE?

For Thames Water, any return to the London Stock Market would navigate it out of a turbulent time in private hands.

It was privatised in 1989, when one of the highest profile moments in Margret Thatcher’s reform floated it on the London Stock Exchange.

Thames delisted in 2001 after a £4.3bn takeover by the German utility RWE.

In 2006, RWE sold Thames to a consortium called Kemble Water Holdings led by Macquarie Bank. The Australian financier was the main owner for the next 11 years, during which time Thames paid out almost £3bn in dividends to its parent. The payouts were funded in part by borrowing taken out against Thames’ assets.

Macquarie went on to reduce its stake in Thames’ holding company, and by 2017 had sold out to OMERS, a Canadian pension fund, and the Kuwait Investment Authority.

Thames, based in Reading, has been struggling with a debt pile of almost £20bn for the last two years, enough to take it to the brink of collapse.

A Thames Water spokesperson said: “Thames Water remains focused on securing a recapitalisation to restore financial stability, continue its operational turnaround and deliver essential services for 16m customers. 

“We are already making significant progress in improving performance for customers and the environment, and the proposed deal is intended to support and accelerate that turnaround.” 

City doubts- and a wider warning

In the City, there were doubts about the potential appeal of any future share issue from Thames. “It may be a hard sell for investors given [Thames’] difficult history,” said Dan Coatsworth, head of markets at broker AJ Bell.

“The company made the water utilities sector’s name mud with the public, investors, regulators and politicians. The latest reporting suggests a significant outlay will be required to get a creditor-backed takeover of Thames Water off the ground. The deadline is ticking.”

Alongside the announcement of the enforcement measures taken over Pennon, Ofwat’s Lynn Parker, senior director for enforcement, issued a wider warning, which rang out over the sector: “Water companies should be in no doubt that they will be held to account if they fail to meet their legal obligations to customers and the environment.”