Britain's largest water company struggles with $19.7 billion debt mountain

Engineers from a team detecting leaks at Thames Water unload equipment from their van during a night shift in London, United Kingdom, Wednesday, May 2, 2023. The CEO of Britain's largest water supplier resigned with immediate effect on Tuesday.

Bloomberg | Bloomberg | Getty Images

LONDON — British regulators on Thursday took the unprecedented step of placing the water utility for London and parts of southern England into special measures as the company seeks fresh investment capital to bolster its future.

Regulator Ofwat said Thames Water would come under closer scrutiny and must re-evaluate its plans to improve operational performance, delivery and financial resilience. Ofwat approved £16.9 billion ($21.8 billion) of spending for the company to invest in improving services for customers and the environment – ​​a figure lower than the £19.8 billion Thames Water had requested.

The regulator has meanwhile given the company permission to increase customers' bills by an average of £99 a year for the next five years, almost half what the company had requested.

Thames Water said in a statement on Thursday that its spending proposal aims to “ensure a reliable supply of safe, high-quality drinking water and the disposal and effective treatment of wastewater in London, the Thames Valley and the Home Counties now and in the future.”

Company questioned Ofwat said the business plan was “inadequate” but said it would provide the regulator with additional evidence to support its proposals, noting that a final decision would not be made until December 2024.

The crisis-hit company has more than 16 million customers and is trying to avoid outcomes such as temporary nationalization or breakup. In the spring of this year, shareholders turned down its bid for a £500 million capital injection, while its parent company Kemble in default.

Thames Water is owned by a consortium of institutional shareholders in pension funds, sovereign wealth funds and private equity. The largest external shareholder is the Ontario Municipal Employees Retirement System, one of Canada's largest pension plans.

The company's payment arrears have ballooned over the past two decades and Wednesday reported net debt of £15.2bn in the year to March 2024. It said that under the current base case scenario it would not run out of money until the end of May 2025, assuming it can continue to draw down its revolving credit facilities and use all its cash.

Thames Water and other UK utilities are heavily criticized about the sharp increase in sewage discharges into British waterways, including the River Thames.

Thames Water chairman Adrian Montague said on Wednesday the company's plan would attract “much-needed investment”, adding that he was confident it was possible to “get this business back on track”.

Montague said in the company's results that the UK water industry will require significantly higher investment in the coming years and is competing for debt and equity in a “highly competitive market, at a time of increased regulatory and political uncertainty and risk.”

An aerial view of sewage being processed at Thames Water's Longreach Sewage Treatment Works on August 10, 2023 in Dartford, United Kingdom.

Carl Court | Getty Images News | Getty Images

To achieve a “market-led solution”, collaboration with regulators and government is needed to drive a turnaround and ensure investors remain motivated to continue investing in UK water companies, he added.

S&P Global dealt the company another blow on Wednesday as it placed Its Class A and Class B debt are at risk of downgrade, which the company says reflects a belief that Thames Water may not be able to maintain sufficient liquidity, fuelling market fears of a 'junk' rating.

According to S&P, the company's position is under additional pressure due to the large capital investment program required, which will wipe out free operating cash flow and limit its ability to reduce debt.

Correction: The headline of this article has been updated to accurately reflect Thames Waters' total debt, converted into US dollars.

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