UK government looks at nationalising Thames Water as crisis deepens
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Government officials have been in talks about a short-term takeover of Thames Water as both investors and the government prepare for the possible failure of the heavily indebted utility company.
The contingency planning that took place on Wednesday followed the sudden departure of Sarah Bentley, the CEO of Thames Water. Bentley was working hard to improve the financial situation of the company, which had been neglected in the past and had accumulated a debt of £14 billion. Unfortunately, her efforts were hindered by the fact that UK interest rates reached their highest level since 2008.
A year ago, the individuals who own shares in the company made a commitment to put in £500 million of their own money. This was the first time they had invested in the company since it became privately owned. Additionally, they promised to contribute another £1 billion, but only if certain requirements were met. However, the £500 million was only transferred to the company's account in March of this year, and the extra £1 billion has not been given yet.
Cathryn Ross, one of the temporary leaders, recently mentioned that the company has experienced a considerable deficit, which is far from ideal when it comes to acquiring financial resources.
Ross, who used to be the head of Ofwat, has said that it is possible for us to reach out to our shareholders for additional funds. These remarks were not reported until now.
In the midst of negative beliefs about the group's future success, the value of a 2026 bond obtained by the parent firm of Thames Water, Kemble Water Holdings, plummeted by as much as 35 pence to 50p, entering a state of financial distress.
On Wednesday, Thames Water stated that it was collaborating positively with its shareholders to infuse additional funds into the company. This financial support aims to bolster its efforts in turning the company around and aiding its investment plans.
According to sources familiar with the matter, it is improbable that the company will face immediate bankruptcy.
The condition of the water and sewage systems in the United Kingdom has emerged as a contentious topic in politics. There is growing concern regarding pollution levels and the occurrence of leaks. Furthermore, there are doubts surrounding the private utilities' focus on generating profits for shareholders, which may come at the expense of crucial investments.
The environment ministry, Defra, engaged in urgent discussions with industry regulator Ofwat to explore a solution led by the government in case the nation's biggest water company faced challenges in securing private funding in the near future, as shared by government representatives.
Over fifty percent of the organization's debt is associated with inflation, which the company has defended by highlighting that customer invoices are also tied to it. Nonetheless, the debt is correlated with the RPI index, which is currently significantly higher than the CPI inflation, the metric used for billing purposes.
According to authorities, it has been suggested that Thames Water could be subjected to a unique management system. This system, known as the Special Administration Regime (SAR), was introduced in 2011 and essentially puts the company under public ownership. It was initially implemented in 2021 to save the energy provider Bulb.
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"We must ensure the survival and continuity of Thames Water as an organization," stated Kemi Badenoch, the minister responsible for business and trade, during an interview with Sky News. "The various departments within the government are currently exploring possible actions to support this endeavor."
According to a government representative, Defra and Ofwat are preparing themselves for every possible situation.
Another person stated: "In theory, it's possible for the company to be in SAR, but I want to highlight that this is more of a backup plan rather than a desired result."
Thames Water possesses a complex ownership arrangement, consisting of various levels, wherein only one level is subject to regulation by Ofwat.
The business, primarily catering to London and the southeastern region of England, underwent privatization in 1989 under the government of Margaret Thatcher. At present, a consortium of private equity, pension, and infrastructure funds holds ownership over the company.
The primary owner is Ontario Municipal Employees Retirement System, holding a significant 31 percent interest. Other backers comprise the UK pension fund Universities Superannuation Scheme, in addition to the sovereign wealth funds of China and Abu Dhabi, along with Aquila GP's infrastructure fund. These investors chose not to provide any comments.
According to a representative from Defra, the government department is consistently revising existing laws to ensure they are appropriate for the intended purpose. The official also emphasized that such revisions are a standard practice and necessary to prepare for any possible scenario. Not doing so would invite criticism, hence the need for thorough planning.
The government stated: "This issue falls under the jurisdiction of the company and its shareholders. We are taking precautions and planning for various possibilities in the sectors we regulate, such as water, just like any responsible governing body would do."
It stated: "The industry in general is financially strong. Ofwat is still keeping an eye on the financial condition of all the main water and sewage companies."
Ofwat did not promptly reply in response to a comment request. Emergency discussions were initially reported by Sky News.
Following their privatization three decades ago, UK water companies have amassed debts amounting to £60.6bn, resulting in customer bill revenue being redirected to cover interest charges.
The complete industry is currently facing challenges due to the increasing inflation, which includes a significant rise in energy and chemical costs, as well as higher interest payments on their owed money. S&P, the rating agency, has expressed concerns about the future prospects of two-thirds of the UK water companies it evaluates, implying there is a chance of their credit ratings being lowered due to weakened financial stability. On average, over half of the industry's debt is tied to inflation.
In December, Ofwat expressed worries regarding the monetary stability of a few water companies namely Thames Water, Yorkshire Water, SES Water, and Portsmouth Water.
In the year 2021, Southern Water, a service provider to 4.2 million individuals in Kent, Sussex, and Hampshire, was saved from financial ruin. This occurred when Australian infrastructure investor Macquarie stepped in and acquired control over the company through a private transaction with Ofwat.
Extra reporting from Arash Massoudi, Josephine Cumbo, and Robert Smith in the city of London.
