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Thames Water shareholders withdrew from backing the group after the UK regulator called for it to cut the company’s debt and make other structural changes that they estimated would cost up to £8 billion. pounds.
Last month’s backtracking from previous pledges to invest £500m in the troubled utility limited weeks of tension between Ofwat and Thames Water’s shareholders, which include the sovereign wealth funds of China and Abu Dhabi.
Investor resistance to Ofwat’s demands led to the default of Thames Water’s parent company last week.
A private letter sent by the regulator on March 11 requested that, in addition to reducing the group’s debt and improving infrastructure, shareholders consider going public and breaking up the company, according to two people familiar with the matter. requests.
The investors had previously submitted a plan, rejected by Ofwat, under which they would inject £3.25 billion of capital, reinvest company profits, receive no external dividends and invest £18 billion by 2030.
Instead, Ofwat has directed that Thames Water reduce its gearing ratio – a measure of debt to equity – from around 80% currently to 75% by the end of 2030, before a further reduction to 70% by the end of 2035. Shareholders have calculated that, together with other conditions, this would bring the amount of new money they would need to pour into the business to more than £8 billion, the sources said.
The investors – who also include Canada’s Omers pension fund and Britain’s USS university scheme – announced two weeks after Ofwat’s letter that the company was “uninvestable” and backtracked on a pledge to invest another $500 million of pounds. They then signaled that they were willing to withdraw and accept an estimated £5 billion loss. By April 5, Thames Water’s parent group said it had defaulted on payments on a £400 million bond.
The company, which provides water services to 15 million people in England, now faces a messy debt restructuring or even the prospect of temporary renationalisation under the government’s special administration regime. In the process he has become a lightning rod for public anger over wastewater pollution and mistrust in England’s privatized water system.
Thames Water shareholders were caught by surprise by Ofwat’s new conditions, according to people familiar with the discussions, and felt the regulator was trying to enforce them without a proper consultation process.
Investors’ initial proposals to Ofwat would have resulted in a 56% increase in bills, including inflation, by 2030. They had also called for limits on regulatory fines because they deplete cash available to deliver much-needed improvements to infrastructure.
In an investor presentation in December, Thames Water predicted its debt ratio would rise to 84% at the end of 2025, although shareholders would inject a further £750m of capital into the company by then.
“Ofwat has refused to recognize that its regulatory model gives the company absolutely no breathing room, nor the funding efforts needed to recover and deliver for customers and the environment,” said a person familiar with the discussions.
“The bottom line is that the regulator has a responsibility to ensure that water companies remain profitable to cover their costs,” he added.
The regulator is not expected to make its draft decision on company business plans, including increases in customer bills, until June. The final decision will not be made until the end of the year, after which it can be contested by companies.
Thames Water is struggling with the effects of higher interest rates on its debt, but says it has enough liquidity to continue operating for another 15 months. However, billions of pounds more of investment is needed to address sewage discharges, water leaks and storage to prevent potential water shortages.
An Ofwat spokesperson said: “We do not comment on speculation. Ofwat is continuing to work on the draft determinations which will be published in June.
“We will continue to monitor Thames Water as it seeks to improve its performance for customers and the environment.”
Thames Water and Kemble declined to comment.