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Thames Water owners pile group with debt

The owners of Thames Water lent the £500mn that the utility later presented as “new equity funding”, in a move that will raise further concerns over the financial stability of Britain’s largest provider of water and sewerage services.

The unregulated parent company of Thames Water in March received a £500mn loan from its shareholders — charging 8 per cent annual interest — in an arrangement that highlights the complicated structure of water company ownership.

Thames Water, which supplies water to about 25 per cent of the population in England, presented the loan in March as “£500mn of new equity funding from its shareholders” to improve “leakage and river health” and deliver a turnaround plan.

However, the recapitalisation involved the owners — which include sovereign wealth, private equity and pension funds — providing a £515mn convertible loan to Thames Water’s parent entity, Kemble Water, according to the company’s accounts.

Kemble then “cascaded” £500mn of this borrowed money down the chain of holding companies that own Thames Water into the regulated utility.

The £515mn increase in debt at Kemble has pushed the group’s consolidated borrowings to over £18bn, having risen from just over £15bn as of March 31 2022. The loan could convert to equity in the future. It is treated as a liability in Kemble’s accounts.

The arrangement will add to concerns over the financial future of London’s water provider. The company was plunged into turmoil after Sarah Bentley, the chief executive, abruptly quit after a boardroom row in June. Cathryn Ross, a former head of regulator Ofwat, is acting as interim head until the company appoints a new chief executive early in the new year.

The utility is now under close watch by the government, which is on standby for a temporary nationalisation in case it collapses. It is also seeking approval from Ofwat to be allowed to increase customer bills by around 40 per cent — before inflation — by 2030.

MP Tim Farron, environment spokesperson for the Liberal Democrats, said the funding arrangement was “scandalous”.

“Ofwat are clearly not up to the job. Conservative ministers must haul Thames Water in for emergency talks to demand answers, as well as launch an independent inquiry. If a single penny of this is passed on to billpayers then it will be nothing less then a national scandal.”

Dr Kate Bayliss, research associate and water expert at Soas University of London, said it was “outrageous that both Thames Water and Ofwat led us to believe that the company was getting £500mn of new equity investment when it was in fact just a loan”. 

“It’s not surprising that shareholders want to protect their money but it makes it unclear how much — if any — is going to reach frontline services, and what is likely to happen to the additional funds raised from shareholder bills.” 

Kemble Water has no income other than dividends from Thames Water, meaning any interest payments on the loan may ultimately be borne by customers through their bills. Thames Water is already struggling with high interest rates on its debt, more than half of which is linked to inflation, as well as rising energy and staff costs.

Flowchart showing Thames Water's complex structure

The company says it will need more shareholder funding to deliver its turnaround plan, cut sewage, improve leakage and reduce the likelihood of water shortages during dry spells. Thousands of customers in west London were left without water for several days in September because of failures at water treatment works. 

At an online meeting held with Thames Water customers late on Thursday, Ross said the company was running behind on improvements due by 2025 and was having to defer — though not drop — some of the work. “We have left ourselves with too much to do in too little time,” she added. “We’re having to rephase the delivery of some of these schemes.”

The company says it has a conditional agreement from shareholders to invest an extra £750mn in equity by 2025, and says it requires a further £2.5bn by 2030. 

However, its largest investor, the pension fund Omers, took a 30 per cent write down on its Thames Water stake last year, raising concerns over investors’ willingness to put more cash into the business. 

Omers did not respond to a request seeking comment. USS, another large shareholder, declined to comment.

Investors, which include sovereign wealth funds, have asked for a number of conditions to be met in order for them to invest equity including restrictions on regulatory fines, improvements to the allowed rate of returns and increases to bills. 

Tim Whittaker, head of data at Edhecinfra and Private Assets, a research institute, said the “loans wouldn’t do anything to significantly de-lever Thames’ balance sheet, which has been one of the core risks investors have had to reprice recently”. 

Whittaker added that it was “unclear if these repayments would be blocked” by Ofwat under new licence agreements that take effect in 2025 and which are meant to restrict underperforming monopolies’ ability to pay dividends.

Thames Water said: “We are extremely fortunate to have such supportive shareholders. Their commitment to delivering Thames’ turnaround and life’s essential service is reflected in the largest shareholder support package ever proposed in the UK water sector, whilst taking no dividends out.” 

“Our audited 2022/2023 annual report and accounts record that £500mn was invested by shareholders into the business.”

 Ofwat said: “Thames Water must address their operational shortcomings and strengthen their financial resilience. The recent injection of £500mn new equity into the business is welcome in that regard. All dividends paid by the regulated company must be declared in accordance with company law and the terms of their licence. We have new powers to take enforcement action against companies that break the rules.”

Thames Water was formerly owned by funds managed by Macquarie and other shareholders between 2007 and 2017. During this period they raised its debt from £3.4bn in 2007 to £10.8bn when it sold the business in 2017.  Macquarie said that £12bn went towards investment in the network during this period.

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