Water firms need £11bn on tap

WATER companies are preparing to raise a whopping £11bn to help finance a huge capital investment programme designed to shore up their crumbling pipeline network.

The massive funding needs may trigger a spate of rights issues and new debt.

North West-based United Utilities set the ball rolling in March when it launched a bumper £1bn rights issue to help fund its £3.5bn projected capital expenditure.

UU's issue was offered at a deeply discounted 330p, compared with the previous 530p, to ensure its success among sceptical shareholders.

But as the utilities rush to tap their investor base, alarm bells will be rung about the possibly perilous increase in debt levels amid fears investors might not be prepared to shell out any more cash.

At end-March, the 22 water utilities were collectively £19bn in the red. They had virtually no debt at privatisation in 1989. UU's debt pile stands at more than £4bn. After a steep fall in interest rates, companies have been keen to use debt to drive down their capital costs.

Pamela Taylor, chief executive of industry body Water UK, unveiled plans to spend £21bn between 2005 and 2010 on new plant and pipelines.

This is up nearly 25% on the £17bn spent in the five years to 2005. Taylor said more than 90% of the £21bn was to conform with European Union rules.

She said the cash injection was vital in order to combat 'the ravages of time on an ageing infrastructure' and to ensure the industry meets EU guidelines on clean water and pollution levels.

Substantial rises in bills are to contribute £10bn, but the rest will have to come from new debt or equity issues.

Taylor said: 'To get the work done means attracting more funding from shareholders and the debt markets, the main sources at present.'

United Utilities fell 3p to 465p. Kelda and Severn Trent were also lower. Severn and Pennon (up 1/2p at 590p) are possible candidates for capital raisings.

Brokers expect the shares to be overshadowed until the new price regime is clearer late next year. Further Brussels directives could add a further £9bn to funding needs over 10 to 15 years.