What next for Thames Water?

Thames Water is facing difficulties as they are short on money, finding it challenging to regulate sewage discharges as well as water leaks. Besides, they lack adequate storage space to handle deficits during periods of high temperatures.

Worries about the fate of the UK's largest water supplier came to a head recently, as the company's shareholders declined to provide £3 billion of necessary funds, despite almost a year of discussions with the water industry's governing body, Ofwat.

The authorities are now in a hurry to find a solution with regards to Thames Water.

The situation is serious because customers will have to pay more money, investors such as pension funds could suffer substantial losses, and the government may have to take over the responsibility of providing water and sewage for around one-fourth of the population.

Could Thames Water Become Public Again?

The government and Ofwat have made it clear that they do not intend to take over the control of Thames Water. This decision is partially based on the fact that doing so would create more stress before the upcoming general election.

It is possible that there is no alternative. The corporation requires a sum of £3 billion in equity before 2030 in order to compensate its employees and providers, as well as to finance the upkeep and advancement of its infrastructure.

Last year, nine shareholders of the group, including pension funds Omers and the USS, funded the company with a £500mn equity loan through Kemble, Thames Water's parent company, with an interest rate of 8 per cent.

However, they are hesitant to put in additional money unless Ofwat agrees to their requests for increased charges, dividends to help cover their debts, and a reduction in regulatory penalties. This includes the £500 million that investors had said they would contribute, but only if certain conditions were met, by the end of March 2021.

Despite the absence of calls from both Labour and Conservatives for the renationalization of water companies, there is a growing demand from the general public, as indicated by a June 2019 YouGov poll wherein 69% of respondents believed that water firms should be brought under public control.

In case the government is compelled to take over ownership again, Railtrack could be the most similar example to consider. Railtrack, which was responsible for the railway infrastructure, had to face similar public outrage due to safety concerns. As a result, it was put under special administration in 2002. Shareholders were paid £500mn by the government, and the business was finally nationalised as Network Rail.

What Other Choices Are There?

Thames Water is in need of fresh investors, which is a priority for both the government and Ofwat. Yet, there exist numerous barriers that may impede this goal from being realized.

The lack of clear regulations and a long period of insufficient funding make investing in Thames Water unappealing.

Possible fresh financiers will have to hold off until Ofwat releases its preliminary results in mid-June, which will indicate how much Thames Water can augment charges for its subscribers within the next five years.

Prior to this, Kemble has a debt of £190 million that needs to be paid by April 30. However, the company has stated that without fresh funds, it is unlikely that they can make the repayment. This situation could lead to complicated debt restructuring or even bankruptcy.

It is possible for bondholders and banks to attempt to gain control of the company by exchanging their debt for equity.

However, it's not certain if they would be interested in acquiring a struggling company that requires massive amounts of funding and has faced public backlash for discharging sewage.

Why Is Thames Water Deeply In Debt?

In 1989, Margaret Thatcher, who used to hold the position of prime minister, decided to privatise the water companies and clear out their debts. But, unfortunately, the debt of Thames Water has increased over the years and now stands at a staggering £18.3bn as it has been passed between different owners.

In 2006, Macquarie, a company that manages assets in Australia, purchased Thames Water from RWE, a utility group in Germany. At the time of the purchase, the water company had accumulated a debt of £3.4 billion.

When Macquarie sold off their remaining share of Thames Water back in 2017, they had already used up £11 billion of customer funds on improving the infrastructure. However, rather than utilizing any fresh funds to support the company as was claimed at the time of privatization, they had withdrawn £2.7 billion in dividends and £2.2 billion in loans, as per the insights gathered by the Financial Times.

In the meantime, the pension shortfall expanded from £18 million in 2006 to £380 million in 2017. Additionally, the amount of money that Thames Water owed also dramatically rose from £3.4 billion in 2007 to £10.8 billion at the time it was sold.

Thames Water has announced that it will be unable to execute its turnaround plan without additional funding from its shareholders.

S&P, a rating agency, has revealed that over 50% of the debt held by Thames Water is connected to inflation rates. This has resulted in the company having to pay increased levels of interest as inflation levels have surged over the past year and a half.

The company may be subjected to hefty penalties as a result of the criminal inquiry being conducted by the Environment Agency regarding suspected shortcomings in the operation of their sewage treatment facilities.

Thames Water's Operational Challenges

Thames Water recently acknowledged that its outdated infrastructure, such as aging water pipes and sewage treatment plants, is becoming more susceptible to damage. As a result, the company is now allocating more funding towards repairs, which means that there is less available cash for important improvements.

Families across London and the surrounding area have experienced water outages for a few days on two separate occasions in recent months. The main cause seems to be issues with the pumping stations.

In London, the majority of water pipelines are over 100 years old and are so big that divers might be needed to fix them.

Another problem is that certain pipes are constructed from asbestos and lead and need to be substituted. Yet, the fact that Thames Water has only been replacing 0.5% of their pipes annually since 2015 gives rise to two major concerns. One, it would take approximately 2000 years to replace all of the pipelines in the city. Two, this yearly replacement rate is below the global benchmark.

Many individuals are experiencing strong emotions due to sewage contamination. Records released by the Environment Agency recently revealed that Thames Water's 47 overflows disposed of untreated sewage into waterways over 100 times in the past year.

The yearly varsity boat race is set to happen this weekend, even though there have been cautions about elevated amounts of hazardous contamination due to sewage present in the River Thames.

Political Consequences: What Now?

Thames Water is creating political controversy due to two main reasons. The first one is that it's part of an industry that often disposes of sewage in the water bodies, which is not well-received by the public. Secondly, there are critics who view Thames Water, being a massive enterprise with a lot of debt, as evidence that privatising water was a grave error.

On Thursday, Michael Gove, who holds the position of levelling-up secretary, aimed to connect with the current social and cultural movement, as he condemned Thames Water's leadership as "disgraceful". According to Gove, the organization had prioritized making a profit over investing in development, however, he went on to say that punishing the customers was not the solution.

However, Gove's showboating contradicts the government's covert strategy for the past year.

Even though there is no proof that government officials pressured Ofwat to comply with the company's requests, there were some who were secretly optimistic that the regulatory body would grant certain "relaxed regulations," such as lower penalties and increased costs for customers, to appease the company's investors.

The governing body refused to.

A source has revealed that individuals at Ofwat have a strong commitment to their econometric models. Their strict adherence to this approach could lead to struggling water companies being penalized even more. Unfortunately, this mindset could cause them to overlook the consequences of a major water company collapsing, not only for the water industry but also for the economy at large.

Ofwat chose not to provide a statement.

If Thames Water were to ultimately fail, the regulator's seeming resistance to compromise would create a political conundrum for the ruling party.

A high-up member of the Labour Party expressed their wish that the struggling water company in question would go bankrupt before the upcoming election, taking into account worries regarding other similarly indebted water companies.

Similarly, an assistant of the Conservative government expressed their wish for Thames Water to continue facing obstacles until the following year, stating that nobody desires to be responsible for investing huge amounts of money into an unfavorable sector while public services are in dire need of funding.