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The UK government is awaiting a possible collapse of Thames Water and ministers are considering options including the temporary nationalization of the indebted company.
Defra, the environment ministry, is holding emergency talks with industry regulator Ofwat to discuss contingency plans in case the country’s biggest company is unable to raise private funds in coming weeks, according to government officials.
One option is to put Thames Water, the UK’s biggest water company, into special administration (SAR), they said.
The SAR process, which was introduced in 2011 and would effectively mean public ownership, was first used in 2021 for the temporary 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,” a government official said.
Another said: ‘Theoretically the company could end up in SAR, but I have to stress that this is actually a contingency plan rather than a preferred outcome.’
The prospect of temporary nationalization sent the price of a 2026 bond sold by Kemble Water Holdings, the parent company of Thames Water, plummeting from 35 pence to 50 pence in troubled territory.
The talks come a day after Thames Water chief executive Sarah Bentley stepped down with immediate effect after just three years on the job. It was in the second year of an eight-year recovery plan to tackle leaks and reduce sewage discharges into rivers, a legacy of underinvestment in infrastructure.
But the company, which primarily serves London and the south-east of England, was struggling to make progress and a freedom of information request published this week revealed that the leak rate from Thames Water pipes was the highest in five years.
The utility, which is owned by a group of private equity, pension and infrastructure funds, has £14billion in debt. The largest shareholder in Thames Water is the Ontario Municipal Employees Retirement System, with a 31% stake. Other investors include UK pension fund Universities Superannuation Scheme as well as Chinese and Abu Dhabi sovereign wealth funds and infrastructure fund Aquila GP.
Last year shareholders invested £500m in the company – the first injection of capital since privatization – and pledged a further £1bn with conditions, acknowledging that “additional shareholder support could be necessary”.
A Defra official said the department is ‘constantly’ updating current legislation ‘to ensure it is fit for purpose’, adding: ‘We naturally do that and you would criticize us if we didn’t. , we have to plan for all eventualities.”
A government spokesman said: “It is the business of the company and its shareholders. We prepare for a range of scenarios in 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 condition of all major water and sanitation companies.
Ofwat and Thames Water could not immediately respond to requests for comment. Emergency talks were first reported by Sky News.
After being sold off with almost no debt during privatization three decades ago, UK water companies have taken on £60.6billion in borrowings, diverting revenue from customer bills to pay interest payments .
The entire sector is now under pressure due to rising inflation, including soaring energy and chemical prices and rising interest payments on its debts. S&P, the rating agency, has a negative outlook for two-thirds of the UK water companies it rates, indicating the possibility of downgrades due to weaker financial resilience. More than half of the sector’s debt on average is linked to inflation, putting pressure on companies in the current environment.
Ofwat expressed concern in December about the financial resilience of several water companies: Thames Water, Yorkshire Water, SES Water and Portsmouth Water.
In 2021 Southern Water, which serves 4.2 million customers in Kent, Sussex and Hampshire, was rescued from the brink of bankruptcy after Australian infrastructure investor Macquarie agreed to take control of the undertaken in 2021 under a private agreement with Ofwat.