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Ministers discussed the temporary nationalization of Thames Water as investors and the government prepare for the possibility of the debt-laden facility collapsing.
Wednesday’s contingency plan came a day after the abrupt exit of Thames Water chief executive Sarah Bentley, who had been struggling to turn around a company with a legacy of underinvestment and £14bn of debt just as UK interest rates hit higher levels. levels since 2008.
Shareholders promised 12 months ago to invest £500m in the company – their first share injection since privatization – and pledged a further £1bn subject to terms. But the £500m was not paid until the previous March, and the further £1bn was not paid.
Interim co-CEO Kathryn Ross said earlier this month that the company had “a very significant loss and that’s not ideal in terms of raising capital.”
“We may need to go back to them (our shareholders) to get more shares,” said Ross, the former CEO at Ofwat regulator, in previously unreported comments.
Amid pessimism about the group’s prospects, the price of the 2026 bond sold by Thames Water’s parent company, Kemble Water Holdings, fell by as much as 35p to 50p to the stricken region.
Thames Water said on Wednesday it was working “constructively” with its shareholders to inject more equity into the company to support its “transformation plans and investments”.
Two people close to the situation said the company was unlikely to go bankrupt right away.
The state of the UK’s water and sewage systems has become a hot political issue, with concern about pollution and leaks, and questions about whether privatized utilities prioritize shareholder profits over investment.
The Environment Ministry Defra has held emergency talks with industry regulator Ofwat to discuss a government-led solution in the event the country’s largest water company is unable to raise private financing in the coming weeks, according to government officials.
More than half of the group’s debt is related to inflation, which the company justified by noting that customer billing is also linked to it. However, debt is related to the RPI metric, which is at a significant historical premium to CPI inflation, which is used to price bills.
One option, officials said, is to put Thames water into a private management system. The SAR process, which was introduced in 2011 and will actually mean public ownership, was used for the first time in 2021 to save the energy resource Bulb.
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“We need to make sure that Thames Water survives as an entity,” Business and Trade Minister Kemi Badnoch told Sky News. “My colleagues in government are looking at what we can do.”
“Difra and Afuat are planning all scenarios,” said a government official.
Another said: “Theoretically, the company could end up in search and rescue, but I need to stress that this is very much a contingency plan rather than a preferred outcome.”
Thames Water has a complex ownership structure, with multiple levels, only one of which is regulated by Ofwat.
The company, which mainly serves London and the South East of England, was privatized in 1989 by Margaret Thatcher’s government and is owned by a group of private equity, pension and infrastructure funds.
Its largest shareholder is the Ontario Municipal Employees Retirement System with a 31 percent stake. Other investors include UK pension fund Universities Pension Program as well as Chinese and Abu Dhabi sovereign wealth funds and infrastructure fund Aquila GP. Those investors declined to comment.
A Defra official said the ministry is “constantly” updating existing legislation to “make sure it’s fit for purpose”, adding: “We naturally do that and you’ll criticize us if we don’t, we need to plan for every eventuality.”
The government said: This is a matter for the company and its shareholders. We prepare for a range of scenarios across our regulated industries – including water – as any responsible government would.”
She added, “The sector as a whole is financially resilient. Ofwat continues to monitor the financial condition of all major water and wastewater companies.”
Offate did not immediately respond to a request for comment. The emergency talks were first reported by Sky News.
After being sold virtually debt-free upon privatization three decades ago, UK water companies have borrowed £60.6bn, diverting income from customer bills to pay interest payments.
The entire sector is now under pressure from rising inflation, including higher energy and chemical prices and higher interest payments on its debt. Ratings agency Standard & Poor’s has a negative outlook for two-thirds of the UK water companies it rates – suggesting a possible downgrade due to weak financial resilience. More than half of the sector’s debt on average is related to inflation.
Ofwat said in December it was concerned about the financial resilience of several water companies: Thames Water, Yorkshire Water, SES Water and Portsmouth Water.
In 2021 Southern Water, which serves 4.2m customers across Kent, Sussex and Hampshire, has been rescued from the brink of bankruptcy after Australian infrastructure investor Macquarie agreed to take control of the company in a private deal with Ofwat.
Additional reporting by Arash Massoudi, Josephine Combo and Robert Smith in London
