Thames Water Risks Running Out of Cash If Regulator Rejects Plan

(Bloomberg) -- The future of Thames Water hangs on a decision this week by the industry regulator, coming after Britain’s largest water company admitted it only has enough cash to fund operations for less than a year.

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Ofwat will rule Thursday on Thames Water’s £20 billion ($25.6 billion) business plan — a five-year overhaul of crumbling infrastructure that requires a sharp increase in customer bills. If the watchdog rejects the proposal, the heavily-indebted utility may be unable to raise the funding it needs to stay afloat.

On Tuesday, Chief Executive Chris Weston said he’s “well aware” Thames could run out of money if new equity is not found by the end of May next year. However he maintained the utility is a “long way off” from being temporarily nationalized.

Ofwat is also expected to set key levels for returns needed to attract equity investors.

“The draft determinations which will be released on Thursday are incredibility important for Thames as they provide the foundation on which Thames can seek out new investors,” said Johnathan Owen portfolio manager at TwentyFour Asset Management.

Thames Water is in crisis after shareholders halted new equity injections in March and its parent company defaulted on its debts, leaving it without the investment needed to fund a turnaround plan to stop chronic leaks and sewage spills across London and Oxfordshire.

Liquidity Crunch

Thames said on Tuesday it only had enough liquidity to last through May 2025. Net debt is continuing to grow, as the company seeks new sources of equity to help fund its turnaround plan.

If new equity can’t be found, the government may need to step in to help. But Labour was fast to push back on providing taxpayer help for failing companies.

“There is no program of nationalization for the water industry. Why should bill payers pay twice?” Communities Minister Jim McMahon told the BBC on Tuesday morning.

He said the industry will have to reform after regulation was too weak over the last 14 years. “The days of putting shareholder interest above the national interest can’t carry on.”

Ofwat will indicate on Thursday whether it has made any of the concessions Thames requested including leniency on fines, dividends and financing rules, and approval to hike bills by 40% in order to spend £19.8 billion by 2030. The utility also made the case for better rates of return for investors.

But Ofwat will want to be seen to be taking a tough line on poorly performing companies, and is unlikely to offer Thames the special treatment it’s asking for, according to a person familiar with the plans.

Ofwat’s determinations are important for all water companies in England and Wales since they set out how much customer money they can spend and what kind of penalties they face for poor performance. But the decision is critical for Thames.

Facing Criticism

The ruling will probably draw criticism from all corners, according to Christopher Gasson managing director of Global Water Intelligence.

“The water companies will complain that they can’t possibly deliver the performance required of them on the basis of the money they have been allowed to spend by Ofwat. The public will complain that the proposed bills are unaffordable and the water companies should be made to pay more out of ill-gotten gains. Investors will complain that weighted average cost of capital is too low to finance the investment,” Gasson said.

Weston said an equity raise will start following Ofwat’s ruling this week but isn’t expected to conclude until after a final decision in December. The process would likely “stretch well into next year” and could be dragged out if Thames decides to appeal Ofwat’s decision with the Competition Markets Authority.

The current shareholders have refused any help calling the company’s business plan “uninvestable.” On Monday, Thames shareholders continued a mass exit from the board of parent company Kemble Water Holdings.

How Debt and Sewage Pushed Thames Water to the Brink: QuickTake

Weston said Thames now needed to focus on cost cutting measures. Yet there are signs Thames hasn’t begun that journey yet. Thames paid another £158.3 million dividend to shareholders in March, despite already being under investigation by Ofwat for a previous payment to service debt at Kemble.

The figures on Tuesday show that Weston took a £195,000 bonus for the three months to the end of March, taking his total pay to £437,000.

--With assistance from Alex Wickham and Abhinav Ramnarayan.

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