Britain’s largest water utility grapples with $15 billion debt pile

LONDON — British regulators on Thursday took the unprecedented step of placing the water utility for London and swathes of southern England into special measures, as the company seeks fresh investor funding to shore up its future.

Regulator Ofwat said Thames Water would come under heightened scrutiny and must re-evaluate its plans to improve operational performance, delivery and financial resilience. Ofwat approved £16.9 billion ($21.8 billion) in spending for the company to invest in improving services for customers and the environment — a sum below the £19.8 billion that Thames Water had requested.

The regulator meanwhile gave the company permission to raise customer bills by an average £99 annually over the next five years, nearly half of what it had requested.

In a statement on Thursday, Thames Water said its spending proposal was intended to “maintain reliable supplies of safe, high quality drinking water and to take away and effectively treat wastewater across London, the Thames Valley and Home Counties now and in the future.”

The company questioned Ofwat’s statement that its business plan was “inadequate,” but said it would provide the regulator with further evidence to support its proposals and noted a final determination was not due until December 2024.

The crisis-hit company has more than 16 million customers and is seeking to avoid outcomes including temporary nationalization or being broken up. In spring this year, shareholders rejected its bid for a £500 million equity injection, while its parent company Kemble defaulted.

Thames Water is owned by a consortium of institutional shareholders across pension funds, sovereign wealth funds and private equity. Its biggest external shareholder is the Ontario Municipal Employees Retirement System, one of Canada’s largest pension plans.

The firm’s arrears ballooned over the last two decades, and on Wednesday it reported net debt of £15.2 billion in the year to March 2024. It said that, under its current base-case, it would not run out of money until the end of May 2025, assuming it can continue to draw its revolving credit facilities and utilize all cash resources.

Thames Water — and other British utilities — have been heavily criticized over the sharp increase in sewage discharge into Britain’s waterways, including in the river Thames.

Thames Water Chairman Adrian Montague on Wednesday said the company plan would attract “much-needed investment,” adding that he believed it was possible to “turn this business around.”

In the company results, Montague said the U.K. water industry required sharply higher investment in the coming years and was competing for debt and equity in a “very competitive market, at a time of increased regulatory and political uncertainty and risk.”

Achieving a “market-led solution” will require working together with regulators and the government to deliver a turnaround and ensure investors have the incentives to continue to invest in U.K. water firms, he added.

S&P Global on Wednesday dealt the company a further blow, as it placed its class A and class B debt at risk of a downgrade, which it said reflected a belief that Thames Water might not be able to maintain adequate liquidity — sparking market fears of a “junk” rating.

The Company’s position is under additional strain because of the large capital investment program required, S&P said, which will offset free operating cash flow and limit its ability to de-leverage.