Thames Water Falls Short of Funding Target

Thames Water has announced that it fell short of its target to raise £1 billion of urgent funding. Instead, the troubled British utility managed to obtain a conditional agreement from its shareholders to inject £750 million of new capital. The investors have agreed to deliver the funds by April 2025 if specified conditions are met. These conditions include a business plan that supports a more focused turnaround with targeted performance improvements and appropriate regulatory arrangements.

Importance of Regulatory Arrangements

The reference to “appropriate regulatory arrangements” in the agreement is directly related to the oversight of how much customers’ bills are allowed to grow by the industry watchdog, Ofwat. Thames Water’s agreement with its investors reflects the importance of ensuring the company’s regulatory framework is in alignment with customer expectations and industry standards.

Equity Commitment Supports Bond Performance

The announcement of the £750 million equity commitment has had a positive impact on the performance of the group holding company’s £400 million bond. The bond’s value climbed by 7.5p to 66.5p, indicating investor confidence in Thames Water’s ability to secure the necessary funding for its operations.

Positive Shareholder Support

Cathryn Ross, co-chief executive of Thames Water, expressed gratitude for the unanimous support of the company’s shareholders. Ross emphasized that the timing of the equity injection is strategically advantageous for the company, as it currently has £4.4 billion in cash reserves. The equity commitment provides Thames Water with the financial stability it needs to continue its operations effectively.

Future Funding Needs

Despite securing the £750 million equity commitment, Thames Water has also warned that it will require an additional £2.5 billion from investors by 2030. The company recognizes the ongoing need for substantial investment to ensure the delivery of reliable water and sewerage services to its 15 million customers in and around London.

Metrics for Regulatory Compliance

Thames Water’s shareholders have expressed a desire for “fewer key metrics” to share with Ofwat. While the specific metrics are still being developed, the company acknowledges the importance of prioritizing the metrics that align with its business turnaround objectives and regulatory requirements. This approach allows Thames Water to focus on its most critical areas of improvement while working collaboratively with industry regulators.

Government Oversight

Thames Water operates under close government monitoring, particularly due to its role in supplying water and sewerage services to millions of customers. The government is prepared to implement temporary nationalization measures in the event of a collapse. This level of oversight highlights the government’s commitment to ensuring the provision of essential services to the public.

Debt Management and Financing Challenges

Thames Water has faced significant financial challenges due to rising interest rates, which have increased the cost of financing its debt by £16 billion. Additionally, the company has had to allocate substantial funds towards infrastructure spending following public concern over overflows and wastewater losses. These factors, coupled with rising energy, chemicals, and labor prices, have contributed to a 24% increase in net financing costs for Thames Water in the past year.

Environmental Impact and Fines

The Environment Agency has issued fines totaling £35.7 million to Thames Water for pollution incidents between 2017 and 2023. These fines reflect the company’s responsibility to minimize its environmental impact and prioritize sustainable practices in its operations.

Leadership Changes and Restructuring

Thames Water recently experienced a leadership change when chief executive Sarah Bentley abruptly stepped down two years into an eight-year restructuring plan. Cathryn Ross, a former head of Ofwat, was appointed interim co-CEO alongside Alastair Cochran. The restructuring plan aims to address the company’s financial challenges and improve its operational efficiency.

Infrastructure Investment and Customer Impact

To fund its planned infrastructure investment, Thames Water is proposing a 24% increase in customer bills for the next regulatory period, covering 2025 to 2030. This increase, averaging £101.00 per annum, reflects the company’s need to secure adequate funding for infrastructure improvements and meet its regulatory obligations. Ofwat will receive the final proposals by October, and a decision on the bill increase will be made by December 2024.

Industry-Wide Debt Challenges

Thames Water is not the only water company facing significant debt challenges. Four other companies – Southern Water, SES Water, Portsmouth Water, and Yorkshire Water – are also under review by Ofwat for their financial positions. Although share injections in water companies have historically been rare since privatization in 1989, Yorkshire Water recently received £500 million from investors, and Southern Water announced its intention to seek £550 million from shareholders to address its financial concerns.

Ontario Municipal Employees Retirement System and Other Shareholders

The Ontario Municipal Employees Retirement System (OMERS) currently holds the largest stake in Thames Water, with a 31% ownership. Other significant investors include the UK’s Universities Superannuation Scheme, Chinese and Abu Dhabi sovereign wealth funds, and infrastructure fund Aquila GP. The diverse shareholder base reflects the global interest in supporting the infrastructure and operations of Thames Water.

Conclusion

Thames Water’s achievement of securing a conditional agreement for £750 million in equity funding demonstrates the company’s commitment to its financial stability amidst ongoing operational challenges. The shareholders’ support and the strategic timing of the equity injection will enable Thames Water to execute its turnaround plan effectively while meeting regulatory obligations. With additional funding needs projected for the future, the company remains focused on delivering reliable water and sewerage services to its millions of customers in and around London. The water industry as a whole is navigating significant debt challenges, highlighting the need for innovative solutions and strategic investments to ensure the sustainability of essential services.

Receive free Thames Water PLC updates

We will send you a myFT Daily Digest email rounding last Thames Water PLC news every morning.

Thames Water fell short of its target of raising £1bn of urgent funding, instead obtaining a conditional agreement from its shareholders to inject £750m of new capital.

The troubled British utility said on Monday its investors had agreed to deliver the £750m by April 2025 if certain conditions were met.

These include a business plan ‘that supports a more focused turnaround’ with targeted performance improvements and ‘appropriate regulatory arrangements’ – a clear reference to how much customers’ bills are allowed to grow by the industry watchdog Ofwat.

News of the equity commitment helped a £400m bond issued by the group holding company curb some recent losses, climbing by 7.5p to 66.5p.

“We have the unanimous support of our shareholders,” Cathryn Ross, co-chief executive, said in an interview with the Financial Times, noting that the company had £4.4bn of cash. “We’re getting equity when we need it, and we need it least right now.”

But Thames waterwhich supplies water and sewerage services to 15 million customers in and around London, also warned it would need an additional £2.5bn from investors by 2030.

Referring to terms accompanying Monday’s pledge from investors, Ross said group shareholders wanted “fewer key metrics that we can share with Ofwat.” He described the metrics as a “work in progress,” adding, “We can’t do everything at once and we have to prioritize.”

The company is closely monitored by the government, which is awaiting temporary nationalization in case of collapse.

It had already asked investors for £1.5bn last year, but received just £500m in March.

Ofwat chief executive David Black told a House of Lords committee hearing last week that Thames Water was struggling to secure the remaining £1 billion short term.

The group has come under pressure from rising interest rates, which have raised the cost of financing its debt by £16bn, as well as the need to ramp up infrastructure spending following public outcry over overflows and wastewater losses.

Net financing costs increased 24% in the 12 months to the end of March, while the company was also hit by rising energy, chemicals and labor prices.

The company received £35.7 million in fines for pollution between 2017 and 2023, according to the Environment Agency.

Fears over Thames Water’s finances erupted last month after chief executive Sarah Bentley abruptly stop just two years into an eight-year restructuring plan. Ross, a former head of Ofwat, was later named interim co-CEO alongside Alastair Cochran.

To pay for the planned infrastructure investment, Thames Water is proposing a 24% increase in bills – or an average of £101.00 per annum – for the next regulatory period, which runs from 2025 to 2030. Ofwat will receive the final proposals by October and a decision will be made by December 2024.

Thames Water was owned by Australian investment firm Macquarie for just over a decade until 2017. During that time, the owners drew nearly £3 billion in dividends.

Its largest shareholder is now the Ontario Municipal Employees Retirement System, with a 31% stake. Other investors include the UK’s Universities Superannuation Scheme, Chinese and Abu Dhabi sovereign wealth funds and infrastructure fund Aquila GP.

Thames Water isn’t the only water company grappling with debt. The finances of four other companies – Southern Water, SES Water, Portsmouth Water and Yorkshire Water – are also under review by Ofwat.

Share injections in water companies have been rare since privatization in 1989. But Yorkshire Water received £500m from investors last month and Southern Water said on Friday it would seek £550m from shareholders to shore up its finances. Fitch Ratings said this was a “trigger event” and Southern would be blocked from paying dividends to shareholders under Ofwat’s rules.