Thames Water is actively seeking to avoid the need for substantial taxpayer-funded bailouts. The company is engaging with government officials and the industry regulator, Ofwat, to seek approval for increasing its charges, distributing dividends, and reducing fines.
The potential application of the government’s Special Administration Regime to Britain’s largest water monopoly could result in a taxpayer-funded takeover. This scenario poses a risk to public confidence in the privatized water industry.
Industry experts have interpreted recent updates to water legislation by the government as an indication of Thames Water’s potential financial collapse.
The Department for the Environment, Food and Rural Affairs has initiated “Project Timber,” a contingency plan for Thames Water’s potential failure, recognizing the widespread impact such an event could have.
Ofwat is anticipated to grant some regulatory leniency, such as reduced penalties, to alleviate Thames Water’s financial strain. A senior government official expressed that the collapse of Thames Water is a highly undesirable outcome.
Thames Water has already secured a £500 million loan from investors for its parent company, Kemble Water. Shareholders are reportedly ready to inject an additional £3.25 billion, contingent on favourable outcomes from Ofwat.
This investment plan involves a 40% hike in customer bills by 2030 and a more lenient approach to regulatory fines.
An insider close to Thames Water likened the company’s situation to a room flooded with only a small pocket of air remaining, suggesting that shareholder concessions are crucial for further equity investments.
Recent discussions between Defra, Ofwat, and Thames Water have not been entirely successful, contributing to Sir Adrian Montague’s decision to resign as the chair of Kemble Water.
In the coming weeks, Ofwat will make a decision regarding a potential fine for Thames Water related to a £37.5 million dividend paid to Kemble in October.
Kemble Water, established by Thames Water for fundraising, relies on these dividends to manage its debts. However, new regulations restrict financially unstable water utilities from making such payouts.
Thames Water has stated it will not distribute any funds to investors until a company turnaround is achieved, but Ofwat does not differentiate between internal and external dividends.
Rejecting these dividends could trigger a process by Kemble, leading to increased uncertainty for Thames Water regarding debt repayment and future financing, potentially necessitating government intervention.
Ofwat maintains that Thames Water’s financial issues are separate and won’t automatically lead to Kemble’s administration.
Thames Water’s investors, including significant pension funds and sovereign funds, could face considerable losses, potentially leading to legal actions.
Legal advisors to an investor noted that Thames Water’s reliance on Kemble for additional funding is critical for its business plan. A default by Kemble could raise serious concerns about future fundraising and the company’s viability, possibly prompting Ofwat’s intervention.
Legal experts find it difficult to envisage a scenario without a funding line in place.
Both Kemble Water and Thames Water have declined to comment. Ofwat emphasized that it is Thames Water’s responsibility to secure shareholder support to improve its financial stability.
The government has stated its preparedness for all scenarios in regulated industries, including water, as part of responsible governance.
