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Ministers have discussed a temporary nationalisation of Thames Water as investors and the government braced for the potential collapse of the debt-laden utility.
Wednesday’s contingency planning came a day after the abrupt exit of Thames Water chief executive Sarah Bentley, who was battling to turn round a company with a legacy of under-investment and £14bn of debt just as UK interest rates hit their highest level since 2008.
The state of the UK’s water and sewage networks has become a hot political issue, with attention on pollution and leaks, and questions over whether the privatised utilities are prioritising shareholder dividends over investment.
The prospect of temporary nationalisation sent the price of a 2026 bond sold by Thames Water’s parent company, Kemble Water Holdings, plunging by as much as 35 pence to 50p, into distressed territory.
Defra, the environment ministry, held emergency talks with industry regulator Ofwat to discuss a government-led solution in case the country’s largest water company was unable to raise private finance in the coming weeks, according to government officials.
The shareholders 12 months ago invested £500mn in the company — the first equity injection since privatisation — and pledged a further £1bn subject to conditions. But the £500mn was only paid this March and the additional £1bn has never been paid.
Thames Water said on Wednesday that it was working “constructively” with its shareholders over injecting more equity into the company to support its “turnaround and investment plans”.
More than half the group’s debt is linked to inflation, which the company has justified by noting that customer bills are also linked to inflation. However, the debt is linked to the RPI measure, which is at a historically wide premium to CPI inflation, which is used in pricing bills.
One option is placing Thames Water into a special administration regime, officials said. The SAR process, which was introduced in 2011 and would in effect mean public ownership, was first used in 2021 for the rescue of energy supplier Bulb.
“We need to make sure that Thames Water as an entity survives,” business and trade minister Kemi Badenoch told Sky News. “My colleagues across government are looking at what we can do.”
“Defra and Ofwat are planning for all scenarios,” said one government official.
Another said: “Theoretically, the company could end up in SAR, but I need to emphasise that this is very much a contingency plan rather than a preferred outcome.”
Thames Water has a complicated ownership structure, with multiple tiers, only one of which is regulated by Ofwat.
The company, which mainly serves London and the south-east of England, and was privatised in 1989 by Margaret Thatcher’s government, is owned by a group of private equity, pension and infrastructure funds.
Its largest shareholder is Ontario Municipal Employees Retirement System, with a 31 per cent stake. Other investors include UK pension fund Universities Superannuation Scheme as well as the Chinese and Abu Dhabi sovereign wealth funds and infrastructure fund Aquila GP. Those investors declined to comment.
A Defra official said the ministry was “constantly” updating current legislation “to make sure it is fit for purpose”, adding: “We do it as a matter of course and you would criticise us if we didn’t, we need to plan for every eventuality.”
The government said: “This is a matter for the company and its shareholders. We prepare for a range of scenarios across our regulated industries — including water — as any responsible government would.”
It added: “The sector as a whole is financially resilient. Ofwat continues to monitor the financial position of all the key water and wastewater companies.”
Ofwat did not immediately respond to a request for comment. Contingency talks were first reported by Sky News.
After being sold with almost no debt at privatisation three decades ago, UK water companies have taken on borrowings of £60.6bn, diverting income from customer bills to pay interest payments.
The entire sector is now under pressure from rising inflation, including soaring energy and chemical prices and higher interest payments on its debts. S&P, the rating agency, has negative outlooks for two-thirds of the UK water companies it rates — indicating the possibility of downgrades as the result of weaker financial resilience. More than half of the sector’s debt on average is inflation-linked.
Ofwat said in December that it was concerned about the financial resilience of several water companies: Thames Water, Yorkshire Water, SES Water and Portsmouth Water.
In 2021 Southern Water, which serves 4.2mn customers across Kent, Sussex and Hampshire, was rescued from the brink of bankruptcy after Australian infrastructure investor Macquarie agreed to take control of the company in 2021 in a private deal with Ofwat.
Additional reporting by Josephine Cumbo in London
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