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The water regulator said on Tuesday that Thames Water needs billions of pounds in cash at a time when investors lack the “will” to put more money into the industry.
Ofwat CEO David Black said House of Lords Committee Hearing Britain’s largest privatized water utility was struggling to secure £1bn in the short term, after a year of trying to do so.
“It’s true to say that investors are becoming more concerned about the successful turnaround of the company,” Black told his colleagues. “They are looking to invest in a show that takes confidence in this turnaround plan.”
Ian Coucher, the regulator’s chair, suggested the company may need more, saying there were “talks going on about the remaining £1 billion and whether that will be enough”.
Thames Water, the UK’s largest water company, is struggling under a £16bn debt mountain and is in discussions to raise cash from shareholders. The government is developing a contingency plan for temporary reinstatement. Meanwhile, public outrage is mounting over the amount of sewage ending up in Britain’s waters.
Tuesday’s hearing of the Committee of Lords Industry and Regulators took place hours after Thames Water was fined £3.3m by the Lewis Crown Court. The company pleaded guilty to four counts of polluting rivers near Gatwick Airport in 2017.
Like other water companies, Thames Water must embark on a new bid to raise debt and equity for the next regulatory five-year period, starting in 2025. Black told the committee the company needed strong finances before then.
“Looking to the future, the company recognizes that they need to invest more . . . and to do that they will need a stronger financial position.
Although Thames Water raised £500m in March – its first equity injection since privatization in 1989 – it was only a third of the £1.5bn it first asked for last summer. Black declined to say to the committee how much is needed, but said: “We think it’s essential.”
Black acknowledged that some of Thameswater’s current shareholders may be reluctant to put up money. “It may also be the case that they need to bring in new shareholders,” he said.
Companies are trying to raise new capital to reduce their running, which is a measure of debt to equity.
“We pretty much believe companies need to bring their levels of preparedness down to reasonable levels,” Black said. We’ve encountered significant resistance to doing so from investors and from companies. We are taking action to transform the sector.”
Sarah Bentley, chief executive of Thames Water, resigned unexpectedly last week after just two years into an eight-year turnaround plan. But Black insisted that no crisis was imminent. Thames Water secured £4.4bn in cash at the end of March.
Although the financial strength of other companies in the sector is also under scrutiny, Black said Thames Water was the most exposed due to “continued poor performance” as well as “very highly leveraged”.
However, he said other companies would also need to raise capital after Yorkshire Water raised £500m last week. “I understand that more companies will announce that they will raise capital in the near future,” he said.
There are problems with the investors in the sector, the existing investors, who may not be willing to invest more money in the water companies. . . Other (investors) will have to come.”
Coucher revealed that the regulator raised serious concerns with Thames Water in November last year and again in late March about the progress of its “transformation programme”.
He said Ofat was “very concerned” about the company’s progress. “We’ve known about this struggling company for a while,” he said, adding that the need for an equity infusion had become “acute.”