Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Thames Water is lobbying the government and industry regulator Ofwat to let it increase bills, pay dividends and face lower fines as it seeks to avoid a potential multibillion-pound taxpayer bailout.
Britain’s largest water monopoly is trying to avoid being taken over under the government’s special administration regime, which could leave taxpayers on the hook and undermine confidence in the privatised water industry.
Last week the government passed updated water insolvency legislation, a move seen by industry experts as an indication that a collapse could be imminent.
Officials at the Department for the Environment, Food and Rural Affairs have made contingency plans for Thames Water’s failure and dubbed them “Project Timber” because the collapse of the company, which supplies water and sewage services to about 25 per cent of England’s population, would have far-reaching consequences.
Ministers hope that Ofwat will allow “regulatory easements”, such as reduced fines, that could reduce the financial pressure on the company. “The collapse of Thames is the last thing we want,” said one senior government figure.
The water monopoly has come under increasing financial strain as higher interest rates have increased the costs of servicing its £18.3bn debt. It has already received £500mn from investors in the form of a loan to parent company Kemble Water and insists that equity holders are willing to inject another £3.25bn, but only if they get the regulatory outcome they want from Ofwat.
This includes a 40 per cent increase in customer bills by 2030 to underpin the investment, as well as leniency on regulatory fines and dividend rules.
One person close to Thames Water described the company as “like a flooded room with only an inch of air at the top”. “The shareholders would be irrational to put any equity in if they don’t win concessions,” he added.
However, two people close to the discussions between Defra, Ofwat and the company said that Thames Water chair Sir Adrian Montague had “failed to get everything he wanted” in talks held earlier this month, contributing to his decision to step down as chair of Kemble 10 days ago.
“They came out of the meeting with no deal and concerns that the company would not survive,” the person said.
A crucial first test of Ofwat’s stance will come within weeks when the regulator decides whether to fine Thames for paying a £37.5mn dividend to Kemble last October.
Kemble, which was set up to raise finance for Thames Water, needs the dividends to service its debt but new rules introduced last year forbid water utilities with poor financial records from making payouts.
Although Thames Water insists that investors will not take any cash out of the business until a turnaround is delivered, Ofwat makes no distinction between external and internal dividends.
Ruling out the dividends could ultimately trigger an administration process by Kemble, which could have a domino effect on Thames Water as there would be increased uncertainty over the group’s ability to repay its debts, making further finance unaffordable or even unavailable. This could require government intervention, experts said.
Ofwat insists that Thames Water is “ringfenced” and would not necessarily follow Kemble into administration.
But Thames’ nine shareholders, which include the Canadian pension fund Omers, the UK’s university pension fund scheme USS and the Abu Dhabi and Chinese sovereign wealth funds, would face large losses, which could trigger a host of legal claims.
One partner at a law firm advising an investor in the company said: “Thames Water is dependent on Kemble raising further monies from investors to deliver its business plan. If Kemble defaults on its debt, that raises serious doubt around future fundraising and therefore its viability. This may cause Ofwat to step in to stabilise the position.”
Although it is possible that the business could be restructured without any cost to taxpayers under the special administration regime, lawyers said it was “hard to see a situation where some sort of funding line isn’t put in place”.
Kemble and Thames Water declined to comment. Ofwat said it “is for the company to secure shareholder backing to improve its financial resilience”.
The government said: “We prepare for a range of scenarios across our regulated industries — including water — as any responsible government would.”
