Ministers weigh contingency plan for collapse of Thames Water

The authorities have commenced the process of developing backup strategies for the potential downfall of Thames Water as skepticism within the government intensifies regarding the company's capacity to manage its colossal £14bn debt.

According to a report from Sky News, government officials and Ofwat, the regulatory body for the water industry, have initiated talks regarding the potential implementation of a special administration regime (SAR) for Thames Water. This action would essentially result in the temporary ownership of the company by the public sector.

The government employed a similar bankruptcy procedure when the energy provider Bulb went under in 2021, causing worries that it may impose extensive financial burden on the taxpayers.

In the end, it is probable that the Bulb government's impact on taxpayers' money will be relatively minor. However, due to limitations in water industry ownership rules that discourage merging, the potential financial consequences could be significantly greater if Thames Water were to collapse.

The discussions happening in Whitehall, which include DEFRA, Ofwat, and the Treasury, are still in the early stages. Currently, they are focused on potential measures that might not even be necessary.

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Thames Water caters to a whopping 15 million customers in London and the southeastern region of England. Nevertheless, it has faced immense scrutiny in the past few years due to its abysmal performance in terms of leaks, sewage pollution, excessive executive compensations, and the distribution of profits to shareholders.

Sarah Bentley, the CEO of the company for the past three years, stepped down on Tuesday, effective immediately. In her parting statement, she expressed that the company's transformation efforts have built a solid base for future accomplishments, which includes enhancing customer service and environmental sustainability.

In March, though, it was disclosed by Sky News that Thames Water was in a tight spot regarding its finances. The company enlisted the services of Rothschild, the investment bank, and Slaughter & May, the law firm, to examine potential financial choices.

On Tuesday night, The Daily Telegraph announced that Thames Water was still attempting to gather £1bn from its shareholders. Additionally, AlixPartners has been brought in to provide guidance on the company's efforts to improve its operations.

According to an insider in the field, regulatory authorities have reportedly reached out to professionals specialized in reorganization and turnaround for guidance in the past few weeks, although their specific identities remain unknown.

Bringing Thames Water under temporary public control would undoubtedly ignite demands from skeptics of the privatized water sector to reclaim ownership of all prominent water corporations across the nation.

Thames Water is possessed by a group of retirement funds and national wealth funds, several of which are believed to be doubtful about providing extra financing.

According to the official website of Thames Water, Omers, a massive pension fund based in Canada, is the leading stockholder with a nearly 32% ownership in the company.

Additional examples consist of the China Investment Corporation, which is the sovereign wealth fund of the nation; the Universities Superannuation Scheme, the largest private pension fund in the United Kingdom; and Infinity Investments, a subordinate of the Abu Dhabi Investment Authority.

Hermes, the company responsible for overseeing the pension scheme of BT Group, is also an investor.

Thames Water has a workforce of around 7,000 individuals and provides water services to approximately one-fourth of the total population in Britain.

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Ms Bentley's departure, which occurred shortly after a dispute regarding her announcement of voluntarily giving up an infamous yearly bonus, also indicates underlying disagreements on how to tackle the growing crisis within the company.

Earlier this year, she expressed deep sorrow regarding the company's past deficiencies, attributing them to a prolonged lack of financial support.

Alastair Cochran and Cathryn Ross have been appointed as co-interim CEOs while a search is conducted to find a successor for Ms. Bentley.

Thames Water has been penalized on multiple occasions and is currently under investigation by numerous regulatory agencies.

In the year 2021, it incurred a fine of £4m for the release of untreated wastewater into a river and a park. Additionally, in August of the same year, it was directed to compensate thousands of customers for overcharging in the amount of £11m.

The assortment of financial choices accessible to the board of Thames Water seems to be restricted, as their chairman, Ian Marchant, who used to be the head of SSE, is also expected to resign soon.

Approximately 1.4 billion pounds worth of the corporation's bonds will reach their maturity date by the conclusion of the upcoming year. Due to Ofwat's stringent price regulations, water companies have limited opportunities to generate extra revenue.

In a recent update for investors, Ms Bentley expressed that "the challenging external circumstances have amplified the difficulty of our efforts to turn things around."

One year ago, the company announced that it had reached an agreement with its shareholders regarding the infusion of £500m of fresh capital, with an additional £1bn anticipated to be provided by the conclusion of the following year.

The supplementary investment from shareholders contributed to a growth in expenses, which resulted in a total expenditure of £11.6bn for the ongoing five-year regulatory period, marking a £2bn rise.

In the September update, Thames Water stated that shareholders have expressed their continued support for the company and its business strategy through an Equity Support Letter. In this letter, shareholders have committed to holding investment committee meetings within their respective institutions. These meetings will serve as a way to seek approval from the investment committee for funding their proportional share of conditional commitments, amounting to £1bn, which is included in TWUL's business plan.

Although there is no formal obligation to provide funding, the board of Thames Water finds it justifiable to include an extra £1bn of equity funding in their evaluation.

The business has refrained from distributing any profits to its shareholders in the past six years.

Thames Water isn't the sole prominent water company grappling with doubts regarding its financial stability and operational performance.

Ofwat has also engaged in discussions with other entities, such as Southern Water and Yorkshire Water, in recent times with regards to enhancing financial stability in the face of operational challenges.

The downfall of the largest water company in Britain's finance sector, along with its potential effects on the water ownership model, is bound to become a prominent topic of discussion during the lead-up to the upcoming general election.

Certain opponents of privatisation have insisted that the government should explore alternative ownership models, such as mutual ownership, that would disallow any profits going to shareholders. Instead, these models would ensure that any profits generated are reinvested into enhancing the sector's dismal performance and upgrading water infrastructure assets.

Since the privatization of water utilities in Britain, a substantial amount of money, reaching tens of billions of pounds in total, has been allocated to shareholders. This has provoked public and political resentment due to the industry's frequent accidents and failures.

DEFRA, Ofwat, and Thames Water were all reached out to for a comment during Tuesday night.