Investors and the government are preparing for a possible collapse of Thames Water, which is heavily indebted.
The contingency plan was announced on Wednesday, a day following the sudden departure of Thames Water CEO Sarah Bentley. Bentley had been battling to turn around a company that suffered from under-investment as well as a debt of £14bn at a time when UK interest rates were at their highest since 2008.
Twelve months ago, shareholders pledged to invest £500mn into the company – the first equity injection after privatisation – and a further £1bn under certain conditions. The £500mn payment was made in March, but the £1bn pledged has not been met.
Cathryn Ross said earlier this month that the company made “a very large loss” and it was not ideal for raising capital.
Ross, former chief executive of regulator Ofwat and a previously unknown commentator, said: “We might need to return to them (our shareholders) for more equity.”
The price of the 2026 bond issued by Kemble Water Holdings’ parent company Thames Water plummeted from 35 pence up to 50p. This is a distressed situation.
Thames Water said on Wednesday that it is working “constructivly” with its investors to inject more equity in the company, supporting its “turnaround plans and investment plans”.
According to two people familiar with the situation, the company is unlikely to go bankrupt immediately. The UK’s water, sewage and drainage networks have become a political hot topic. Pollution and leaks are a major concern, as well as questions about whether privatised utilities prioritize shareholder dividends or investment.
According to officials, Defra (the environment ministry) held an emergency meeting with Ofwat, the industry regulator, to discuss a solution that would be implemented by the government in the event the largest water company in the country was unable, in the next few weeks, to secure private financing.
The company has claimed that more than half of the group’s total debt is tied to inflation. It also explains this by pointing out that the customer bills are linked to the same measure. The debt is tied to RPI, which has historically been at a premium to CPI, which is used to price bills.
Officials said that one option would be to place Thames Water under a special management regime. SAR, introduced in 2011, would mean that public ownership is the result. The first time it was used was in 2021 to save energy supplier Bulb.
Kemi BADENOTH, minister of business and commerce at Sky News said: “We must ensure that Thames Water survives as an entity.” “My colleagues in government are looking into what we can do.”
One government official said, “Defra & Ofwat plan for every scenario.”
One person said: “Theoretically the company could be in SAR but I must stress that this is a contingency rather than a desired outcome.”
Thames Water is divided into multiple ownership structures. Ofwat regulates only one of these tiers.
Private equity, pension, and infrastructure funds own the company that primarily serves London and south-east England. Margaret Thatcher privatised it in 1989.
Ontario Municipal Employees Retirement System is its largest shareholder, holding a 31% stake. Universities Superannuation Scheme, the Chinese and Abu Dhabi sovereign funds and Aquila GP are also investors. These investors declined to make any comments.
A Defra official stated that the ministry “constantly updates” current legislation to “ensure it is fit for purpose”, and added: “We do this as a matter-of-course, you would criticise if we did not. We need to plan for all eventualities.”
The government responded: “This is an issue for the company and shareholders.” As any responsible government, we prepare for various scenarios in our regulated industries, including water.
The sector is resilient financially, he said. Ofwat continues monitoring the financial situation of all key water and wastewater firms.
Ofwat didn’t immediately respond to our request for comment. Sky News was the first to report on contingency discussions.
UK water companies, which were sold almost debt-free at privatisation thirty years ago, have borrowed £60.6bn and diverted income from customers’ bills to pay interest.
All sectors are now being impacted by rising inflation. This includes soaring prices for energy and chemicals, as well as higher interest rates on debts. S&P’s rating agency has a negative outlook for two thirds of UK water companies that it rates, indicating a possible downgrade as a result of weakened financial resilience. Over half of the average debt in this sector is linked to inflation.
Ofwat stated in December that they were concerned about the financial stability of several water companies, including Thames Water, Yorkshire Water SES Water, and Portsmouth Water.
Southern Water, a company that serves more than 4.2 million customers in Kent, Sussex, and Hampshire, has been saved from bankruptcy by Australian infrastructure investor Macquarie, who agreed to buy the company privately through Ofwat.