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The UK government is on standby for the potential collapse of Thames Water and ministers are examining options including the temporary nationalisation of the debt-laden business.
Defra, the environment ministry, is holding emergency talks with industry regulator Ofwat to examine contingency plans in case the country’s largest water company is unable to raise private finance in the coming weeks, according to government officials.
The contingency planning comes 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 the highest level since 2008.
The prospect of temporary nationalisation sent the price of a 2026 bond sold by Kemble Water Holdings, Thames Water’s parent company, plunging by as much as 35 pence to 50p, into distressed territory.
One option is placing Thames Water into a special administration regime (SAR), they 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, The company has since been sold by the government to Octopus Energy.
“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 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”.
The company, which 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.
The shareholders last year invested £500mn in the company — the first equity injection since privatisation — and pledged a further £1bn subject to conditions. Thames Water has a complicated ownership structure, with multiple tiers, only one of which is regulated by Ofwat. More than half the group’s debt is linked to inflation.
The company, which mainly serves London and the south-east of England, has been struggling to make progress and a freedom of information request released this week revealed the leakage rate from Thames Water pipes was at the highest in five years.
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.”
A government spokesperson 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.”
They 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.
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