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Thames Water needs billions of pounds more in cash at a time when investors lack the “appetite” to put more money in the industry, the water regulator said on Tuesday.
David Black, chief executive of Ofwat, told a House of Lords committee hearing that Britain’s largest privatised water utility was struggling to secure £1bn in the short term, after a year of trying to do so.
“It’s correct to say that investors have become more concerned about the successful turnround of the company,” Black told peers. “They’re looking to invest in a proposition which requires confidence in that turnround plan.”
Iain Coucher, chair of the regulator, suggested the company could need even more, saying there were “ongoing conversations about the remaining £1bn and whether that is sufficient”.
Thames Water, the UK’s largest water company, is struggling under a £16bn debt mountain and is in discussions to raise cash from shareholders. The government is drawing up a contingency plan for a temporary renationalisation. Meanwhile, public anger is mounting over the amount of sewage that has ended up in Britain’s waters.
Tuesday’s hearing of the Lords industry and regulators committee took place hours after Thames Water was handed a £3.3mn fine by Lewes Crown Court. The company pleaded guilty to four charges relating to polluting rivers near Gatwick airport in 2017.
Like other water companies, Thames Water must embark on a fresh attempt to raise debt and equity for the next five-year regulatory period, starting in 2025. The company needs to have robust finances before then, Black told the committee.
“Looking ahead, the company knows it needs to invest further . . . and to do that they will need a stronger financial position,” he said.
Although Thames Water raised £500mn in March — the first equity injection since privatisation in 1989 — this was only a third of the £1.5bn it first demanded last summer. Black declined to outline to the committee how much was needed but said: “We think it’s substantial.”
Some existing shareholders in Thames Water could refuse to put up the money, Black conceded. “It may well be the case that they need to bring in new shareholders,” he said.
Companies are trying to raise fresh equity to lower their gearing, a measurement of debt to equity.
“We are very much of a view that companies need to bring down their levels of gearing to reasonable levels,” Black said. “We’ve faced huge resistance from investors to do so, and from companies. This is us taking action to change the sector.”
Thames Water chief executive Sarah Bentley unexpectedly resigned last week just two years into an eight-year turnround plan. But Black insisted there was no imminent crisis. Thames Water had £4.4bn in liquidity at the end of March.
Although the financial strength of other companies in the sector is also under scrutiny, Black said Thames Water was the most exposed because of its “persistent poor performance” combined with “very high gearing”.
However, he said that other companies would also need to raise equity after Yorkshire Water raised £500mn last week. “I understand that more companies will announce they have raised equity in the near future,” he said.
“There are issues with investors in the sector, current investors, who may not have the appetite to invest more money in water companies . . . other [investors] will have to come in.”
Coucher revealed that the regulator expressed serious concerns to Thames Water in November last year and again in late March about the progress of its “transformation programme”.
He said Ofwat had been “very concerned” about the company’s progress. “We have known about this struggling company for some period of time,” he said, adding that the need for an injection of equity had become “acute”.