The crisis at Thames Water has created an uncertain future for Britain’s biggest privatised water company. Shareholders are refusing to inject funding in a stand-off with Ofwat. The water industry regulator has refused to allow the company to increase its bills, which investors say makes its proposed turnaround plan “uninvestible”. Adding to its woes, Kemble Water Finance, the holding company of Thames Water, has issued a formal notice of default to bondholders after it failed to make an interest payment due earlier this month. Thames has submitted a new plan which the regulator has yet to approve.
Who owns Thames Water?
Britain’s water and sewerage industry was privatised in 1989 by Margaret Thatcher’s government, driven in part by the need to increase investment to meet European Union environmental standards and to upgrade its network of Victorian pipes. After a period as a listed company, Thames was acquired by RWE, the German utility, in 2001. Five years later a group of investors led by Macquarie, the Australian company, bought it.
During Macquarie’s ownership from 2006 to 2017, Thames paid its investors dividends of £2.7 billion while its debt tripled to almost £11 billion.
Thames, which is Britain’s biggest water company with 16 million customers, is now owned by a group of pension funds and sovereign wealth funds through a series of holding companies. The biggest holders are the Ontario Municipal Employees Retirement System, a Canadian pension fund; the UK’s Universities Superannuation Scheme; the British Columbia Investment Management Corporation; Hermes GPE, the manager of the BT pension scheme; and sovereign wealth funds from Abu Dhabi and China. Its ultimate parent company is Kemble Water Holdings.
Who is the current chief executive?
Chris Weston took over as chief executive in December, following the abrupt departure of Sarah Bentley last June after less than three years in the role.
Weston, 60, previously had run Aggreko, the listed power equipment rental specialist, and before that was managing director of the international downstream division of Centrica, the British Gas owner. He was given a pay package of up to £2.3m a year: a £850,000 salary, £102,000 in annual pension payments, a £15,000 car allowance, and an annual bonus worth up to 156% of his salary.
Sir Adrian Montague, a veteran City troubleshooter, was parachuted in to chair both Thames and Kemble a few days after Bentley’s exit. That seems to have raised concerns among regulators that the boards of the two may not be sufficiently independent.
Montague, 76, stepped down from Kemble last month to focus solely on fully supporting the board and executive team of Thames Water Utilities.
Why is Thames Water in debt?
The company’s ownership structure is complex, but this is not unusual in a utility. The problem for Thames is the weight of its debt compared with its regulatory capital value, a ratio that stands at 77 per cent. Ofwat would prefer it to be closer to 60 per cent.
More than half of Thames’ debt is index-linked, according to Standard & Poor’s, the rating agency, saddling it with higher repayments as inflation has soared over the past 18 months. At the same time, the costs of energy, labour and chemicals have risen.
The company’s shareholders had agreed to invest £750 million last July, with £500 million expected by the end of this month. Thames Water said at that time that it would need further equity of about £2.5 billion from 2025 to 2030. The commitment came after it was revealed that the government had drawn up contingency plans for the collapse of Thames amid growing doubts about the ability to service its debts.
Adding to its problems, Ofwat is deciding whether Thames breached licence conditions by paying a £37.5 million dividend to Kemble Water in October. Kemble needed the money to pay off its own debts, but the utility’s licence means that it must put customers and environmental concerns above paying dividends.
Montague told a parliamentary committee in December that Kemble’s solvency was dependent on these payments and he warned that shareholders would halt their investments in Thames if they were banned.
What have the shareholders said?
Thames Water shareholders are understood to have asked Ofwat, the industry watchdog, to make a number of regulatory concessions. These are said to have included allowing it to increase customers’ bill by 40 per cent by 2030 and imposing lower fines for rule breaches.
The latest crisis comes after an apparent dispute over these concessions. The shareholders have said that Ofwat “has not been prepared to provide the necessary regulatory support for a business plan which ultimately addresses the issues that Thames Water faces”. As a result, shareholders say they are not in a position to provide further funding.
Ofwat said: “Safeguards are in place to ensure that services to customers are protected regardless of issues faced by shareholders of Thames Water. Today’s update from Thames Water means the company must now pursue all options to seek further equity for the business to turn around the performance of the company for customers.”
Weston said that the company was not about to collapse, but that if later next year it had not received equity then there was the prospect of it falling into a “specialist administration”.
Could the government bail out Thames Water?
The government is finalising a renationalisation plan, codenamed Project Timber, in the event that debt-laden Thames Water is unable to recapitalise. It could leave the taxpayer on the hook for billions of pounds.
According to The Guardian, the Project Timber plan, drawn up by the Treasury and overseen by Lord Petitgas, the former Morgan Stanley banker who is Rishi Sunak’s personal special adviser on business, envisages the government taking back control of Thames Water and then putting it into an arm’s-length body. It envisages existing debt-holders taking a 35 per cent to 40 per cent haircut, with the rest of the debt being taken into the public finances.
Asked by broadcasters if the government was ready to step in to support Thames Water customers if necessary, Jeremy Hunt, the chancellor, said: “The Treasury will continue to monitor very carefully what is happening at Thames Water. Our understanding is that the company is still solvent and today’s news should not have an impact on the services received by customers.
What next for the company?
Thames Water has submitted a new business plan to Ofwat as it attempts to secure its financial future without the help of its shareholders. The company has resubmitted a plan to Ofwat, the regulator, which will see the group invest £19.8 billion in the five years to 2030. The group had previously promised £18.7 billion of investment.
Thames said that “a rebalancing of operating and capital expenditures” means there is no increase in the 40 per cent projected increase in customer bills in its original submission, that will lift average annual bills to more than £600.
Ageing infrastructure is a continuing problem for Thames, with many of its pipes dating back to the 1800s and early 1900s and struggling to handle rising demand.In 2022 water companies in England alone released raw sewage into rivers and the sea 301,091 times, according to the Environment Agency. Thames Water was fined £3.3 million last July.
Data from Thames Water, analysed by City Hall, shows that there were 6,590 hours of sewage spills in the last nine months of 2023, up from 1,420 hours for the same period in 2022. Between December 25 and December 31 last year, sewage was dumped 18 hours a day on average, amid heavy rainfall.
Water suppliers also need to invest to contend with population growth up 5.9 per cent in the past decade, plus the impact of climate change, which Ofwat warns includes a higher risk of drought, and of sewers flooding from heavier downpours.
What happens next after Kemble Water Finance’s debt default
Kemble Water Finance, which has no funds, is now preparing for talks with lenders and bondholders over its debt structure. It has asked creditors not to take any action to allow it to explore “all options”. Thames Water is unlikely to be affected by the default. However, Thames Water’s shareholders, which include Chinese and Abu Dhabi wealth funds and UK and Canadian pension funds, could see their stakes diluted or wiped out.
Kemble Water Finance, the holding company of Thames Water, has issued a formal notice of default told the holders of £400 million of bonds due in May 2026 after it failed to make an interest payment due this week. The default was expected after Kemble said that it would stop making interest payments. The decision was made after Thames Water shareholders said they would not inject £500 million of fresh equity to fund a turnaround plan in a dispute with the water regulator.