Thames Water, a major water company in England and Wales, is facing severe financial troubles as it struggles to meet its operational costs. The company has admitted that it is running out of money and time, with its current cash reserves only expected to last until May of next year unless it can secure new equity. This has put the company in a precarious situation, as it urgently needs a favorable deal from water regulator Ofwat in order to attract new investors.
On Thursday, Ofwat will release its “draft determination” which will outline its decision on the business plans and customer bills of Thames Water and other water companies for the next five years. This will be followed by a final determination at the end of the year. For Thames Water, this is a crucial moment, as a negative decision from Ofwat could have serious consequences. The company’s existing shareholders have already pulled out of a planned £500m equity injection and cancelled their commitment to provide a further £3bn over the next five years, leaving a significant gap in the company’s finances. Additionally, the company’s debt has increased by £1.3bn in the last year, bringing its total debt level to £15.2bn, with an additional £4bn in parent companies that are not regulated by Ofwat. This has led to downgrades in the company’s debt ratings, with the potential for further deterioration to trigger a default on its group financing arrangements.
Thames Water is hoping for a favorable decision from Ofwat that will allow it to increase customer bills by 44% and support £21bn in spending over the next five years. The company is also seeking leniency when it comes to fines for pollution and other license breaches. According to chief executive Chris Weston, the company needs a deal that is “deliverable, financeable, investable, and affordable for our customers.”
However, this puts Ofwat in a difficult position, as it must balance the need to give shareholders and investors a return on their investment with the responsibility to hold the company accountable for its past mismanagement and poor performance. Punishing Thames Water too severely could have serious consequences, including the possibility of a special administration regime that would leave the taxpayer responsible for a loss-making utility. Thames Water has a history of poor performance, with repeated fines for pollution incidents, rising customer complaints, and persistent issues with leakage. Last year, pollution incidents increased due to a 40% rise in average rainfall, and the number of storm overflows doubled to over 16,000.
Despite the challenges, Mr. Weston remains optimistic about turning the company around, but ultimately, the decision rests with the markets. He acknowledges that the company has been poorly managed in the past and needs to “learn to live within our means.” However, he also highlights the unique challenges of operating in London, a densely populated city with 150-year-old infrastructure designed for a much smaller population. While he does not rule out the possibility of administration, he remains focused on finding a solution and says there is still a lot of work to be done before that point.
The verdict from Ofwat on Thursday will have significant implications for Thames Water and the wider industry. It remains to be seen if the company will receive any special treatment, as any deal offered to Thames Water must also be offered to other water companies. With the future of the company hanging in the balance, all eyes are on Ofwat’s decision.
