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Thames Water calls in advisers on £12bn debt mountain

The UK’s biggest water supplier has called in bankers to advise on its £12bn debt mountain, amid concern about the impact of a looming regulatory crackdown on its finances.

Sky News has learnt that Thames Water has hired restructuring experts from Gleacher Shacklock ahead of a crucial ruling next week from Ofwat, the industry watchdog, that will determine how much it can charge customers over the next five years.

Thames, which is owned by a consortium of international investors, was dismayed by Ofwat’s draft determination in July.

It proposed that the company could spend up to £9.3bn during the next regulatory period – sharply lower than Thames’s own proposed figure of about £11bn.

Thames and a number of other large water suppliers will consider appealing to the Competition and Markets Authority (CMA) if they regard Monday’s settlement as too draconian.

File photo dated 2/8/2016 of the logo of water company Thames Water seen through a glass of water. Utilities regulator Ofwat has warned four water companies that it has "substantial concerns" over their business plans for the next five years.
Image: Thames Water is the UK’s largest water and wastewater services company

Ofwat wants Britain’s water companies to cut the average customer’s annual bill by £50, even as the industry funds an additional £12bn of investment during the period to 2025.

The final price determinations will be accompanied by a string of performance commitments that Thames will have to make relating to leakages and help for vulnerable customers.

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They will also include a package of penalty payments and incentives for suppliers depending upon whether targets are met.

In July, Ofwat approved the spending plans of three of the UK’s water companies, including United Utilities, but sent 14 more back to the drawing board.

Thames has struggled operationally in recent years, despite investing an average of £1bn-a-year in its network and customer service over the last decade-and-a-half.

In 2017, it was fined more than £20m for dumping raw sewage into the River Thames and its tributaries, with a second, smaller, penalty imposed the following year.

Its weak performance led to the ousting of Steve Robertson as chief executive earlier this year.

Sky News revealed several weeks ago that Basil Scarsella, the chief executive of electricity distributor UK Power Networks (UKPN), is the leading candidate to replace Mr Scarsella.

Industry sources indicated this weekend that Mr Scarsella, an Australian, was expected to be named in the coming weeks.

Sewage foam collecting around boats at Bourne End Marina
Image: The firm was fined back in 2017 for dumping raw sewage into the River Thames

Thames is easily the UK’s largest water and wastewater services company with an annual turnover of £2bn.

It has three million residential customers, and 15 million customers in total when accounting for its waste services.

The company employs more than 6,000 people.

Thames’s decision to bring in restructuring bankers underlines the potential funding crisis facing Britain’s biggest water company just days after the threat of being nationalised by a hard-left Labour government evaporated.

John McDonnell, the shadow chancellor, had vowed to seize control of Britain’s water industry, potentially at valuations that would have triggered litigation from shareholders.

The water industry has come under growing pressure from regulators and politicians over its record on leakages and the vast sums which have been paid out during the last decade in dividends.

Even without that threat, Ofwat’s ruling will have a significant impact on Thames’s future.

Like its rivals, Thames is financed through a combination of customer bills, which generates about £2bn-a-year, and debt raised from public and private investors.

The company’s most recent annual report disclosed that Thames had net debt of £11.73bn at the end of March and that the company’s regulatory capital value was £14bn.

An adverse pricing settlement could have profound implications for Thames’s future borrowing capacity as it tries to improve an appalling leakage record.

It was unclear this weekend what the alternative options are that Thames would consider in consultation with its financial advisers.

Water company financing is fiendishly complex because of the way the suppliers fund themselves through different structures and debt instruments.

In October, The Sunday Times reported that a delegation of international investors in British water suppliers had complained to the Treasury that Ofwat had become politicised in its decision-making.

Sources close to Ofwat have dismissed that assertion.

Water tap
Image: Ofwat wants water companies to cut the average customer’s annual bill by £50

Thames was taken over by Macquarie, the Australian infrastructure investor, in 2006, in a deal worth about £8bn.

Macquarie sold a number of stakes to third-party funds before offloading its remaining shareholding in 2017.

The company’s current investor base is led by Omers, the Canadian pension fund, which owns just under a third of the shares.

The Universities Superannuation Scheme (USS), which manages the retirement savings of British academics, is the second-biggest shareholder, with funds from Abu Dhabi, Australia, Canada, China and the Netherlands among Thames Water’s other investors.

Thames’s service area stretches from Gloustershire and Wiltshire in the west, through London and the Thames Valley, to the western edges of Essex and Kent in the east.

Thames declined to comment on Saturday on the appointment of bankers to advise on its debt-pile.

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