What went wrong at Thames Water and what could a bailout look like? | Utilities

Ministers and the water regulator, Ofwat, are scrambling to draw up contingency plans to rescue Thames Water amid fears that Britain’s biggest water company may collapse under a bulging debt pile.

Officials are considering how to take the company, which was privatised in 1989, into temporary public ownership if vital funds cannot be found. The news followed the surprise resignation on Tuesday of its chief executive, Sarah Bentley, and the industry as a whole is under fire over sewage dumping, water leaks, hosepipe bans and billions of pounds paid out to investors.

How did we get here?

Bentley was appointed in 2020 to revitalise the water supplier, which has 15 million customers in London and the south-east. She laid out a plan to invest billions in the leaky network, with shareholders “underwriting a turnaround plan”. Last year, the company received a £500m cash injection from shareholders who had agreed a further £1bn in principle. Bankers at Rothschild were hired in March to examine financing options for the firm, which has £14bn of debt and 7,000 employees.

On Wednesday, after reports about the possibility of a bailout emerged, Thames said it was “continuing to work constructively with its shareholders” and had £4.4bn of cash on its balance sheet. Its largest investor is Ontario Municipal Employees Retirement System (Omers), a Canadian pension fund, alongside the Universities Superannuation Scheme (USS), China Investment Corporation and Abu Dhabi’s Infinity Investments.

What happened to Bentley?

Bentley abruptly stepped down as chief executive without a clear reason for her resignation and only a brief statement saying: “The foundations of the turnaround that we have laid position the company for future success to improve service for customers and environmental performance.”

Industry sources said she had privately expressed frustration over the former owner Macquarie’s underinvestment in the business, while other sources noted that Thames’s annual report was due on Tuesday next week and would lay out the company’s performance in stark terms. Bentley has also faced uncomfortable headlines of late over the water company’s leakage record and her decision to give up her bonus but receive larger, separate payments, which was labelled a “PR stunt”.

What was Macquarie’s role?

While the consortium that has owned Thames since 2017 has yet to take a dividend out of it, its predecessor – the Australian bank Macquarie – has been widely criticised for its stewardship of the water company between 2006 and 2017. It has faced accusations of “asset stripping” and “ripping off the taxpayer” by not paying corporation tax. It is estimated that Macquarie left Thames with an extra £2.2bn in loans and £2.7bn was taken out in dividends, while the water company’s debts rose sharply from £3.4bn to £10.8bn under its ownership.

Eyebrows were raised when Macquarie was allowed by regulators to wade back into the English water industry in 2021, with the acquisition of struggling Southern Water. The then Ofwat chair, Jonson Cox, warned the regulator would be “monitoring the performance of the company closely” when it took control.

What could a Thames bailout look like?

The government has had to intervene in several high-profile corporate failures over the last two decades, including the bust bank RBS, British Steel and most recently the collapsed energy supplier Bulb, which was eventually acquired by Octopus Energy after nearly a year in government hands.

Whitehall sources say the greatest parallels are with Railtrack, which was placed into a government handled administration in 2001. Sources suggest management at both Railtrack and Thames had underestimated the amount of investment required, meaning assets were valued higher than was merited.

Ofwat says that the special administration regime, enshrined in law under the Water Industry Act 1991, is designed “not to keep a company in business but rather to ensure that the provision of services to customers is maintained” – meaning investors “bear an appropriate level of risk in relation to the decisions that they make” and reducing the “risk to taxpayers that they will have to bear costs relating to a failed company”. If any of the cost does reach billpayers, that could come on top of the 40% increase in bills mooted by water companies in England.

Are there financial concerns over other water companies?

Yes, the sharp increases in inflation and interest rates have pushed up costs in a debt-laden sector. South East Water said in its last annual report that those increases may “adversely affect the company’s financial performance”, with the cost of its debt increasing. Last autumn, Yorkshire Water agreed to repay £941m of inter-company loans to improve its financial resilience.

Ofwat’s financial resilience monitoring report noted in December that the credit ratings of six water companies – Northumbrian, Southern, Thames, Affinity, South East and South Staffs – were at the lower end of the investment grade rating.

The regulator also said there was “scope for improvement” in the transparency and detail of Thames, Bristol, Yorkshire and SES Water’s “long-term viability statements”, which they are required to submit annually.