How Thames Water’s push for higher bills took it to brink

Shareholders’ snub may have driven the final nail in supplier’s coffin. Matt Oliver, Ben Marlow and Michael Bow report

The crisis at Thames Water leaked out late on Wednesday as directors gathered for an emergency board meeting, some joining via video conference and others round a table at its London office. At the top of their agenda was the impending £500m cash injection from the company’s investors, due before the end of the month.

With the Easter weekend days away, however, there was a big problem: the shareholders had decided to cut Thames off. Their move followed months of fraught discussion with Ofwat, the regulator, about Thames’s spending plans for 2025 to 2030 – which include a 40pc rise in customer bills. The company, which supplies 16m households across London and the South East, argues that the increase is essential for it to balance its books, upgrade creaking infrastructure and offer a decent return to shareholders.

In further requests that raised eyebrows, Thames also said it should be allowed to pay out dividends to shareholders once again – following seven years of abstinence – and pay smaller fines for sewage leaks.

But Ofwat was having none of it. The watchdog suggested it would reject these demands in the summer.

In response yesterday morning, with Thames Water’s funding deadline about to pass, investors threw up their hands publicly and declared the company “uninvestable”. “We’ve done everything we can,” one Thames backer says of the move. “But there’s a limit, which has been reached. No responsible investor can continue to support a regulated business which is systematically not allowed by its regulator to cover its costs.”

The crisis has triggered renewed fears that the business could collapse, requiring a taxpayer bailout that could run to as much as £5bn.

Jeremy Hunt, the Chancellor, on Thursday said the Treasury was monitoring the situation but insiders at the Department for Environment, Food and Rural Affairs were keen to stress that ministers would not intervene in talks between a private company and a regulator.

The cancelled cash injection was part of a £3.75bn funding package promised to Thames through to 2030, by the group of pension funds, infrastructure investors and foreign states that collectively own it. But to get the money, key conditions needed to be met. Most crucially, the company – Britain’s largest water supplier – needed to secure Ofwat’s approval for the 2025-30 business plan. This proposes spending £18.7bn in total over the five years, including £4.7bn on network upgrades.

It would have been largely funded by a 39.6pc increase in bills, from an average of £436 per household to £609. But that is understood to have met stiff resistance from Ofwat, which in private discussions has indicated the rise is too steep – and would effectively force consumers to pay the price for Thames’s huge borrowing binge.

The company is buckling under a near-£19bn debt mountain. And though its financial struggles have become more acute in recent months, the problems it is facing arguably trace back to its past owner Macquarie.

When Macquarie bought Thames in 2005 from Germany’s RWE, the water company’s net debt stood at just £2.4bn. But by the time Macquarie offloaded Thames to its current shareholders just over a decade later, borrowings had mushroomed to nearly £11bn.

That was after Macquarie had also helped itself to nearly £3bn in dividends, something it has been heavily criticised for ever since. (The Australian investment giant has repeatedly defended its stewardship, pointing out £12bn was spent on investment in the network.)

Now, regulators fear that allowing Thames to simply raise bills drastically represents a moral hazard.

A source close to Ofwat said UK households shouldn’t be expected to foot the bill for the company’s past profligacy, adding: “They are looking for a very generous settlement. The regulator believes that ‘investability’ cannot mean customers are paying for financial engineering that has gone wrong – that’s just unacceptable”.

Yesterday, insiders also expressed suspicion about the timing of the announcement by Thames Water and its shareholders.

The March 31 deadline for funding, the source said, was self-imposed. They noted Ofwat’s draft decision isn’t due for another two to three months, while Thames’s finances are no different today compared to yesterday.

Meanwhile, Ofwat boss David Black has attacked the water industry more broadly for its record of prioritising dividends over investment in pipes and other infrastructure.

“In some cases, companies have increased their debt levels to pay dividends … That’s not the right thing to be doing. They need to change that,” he said last year.

The regulator itself has come under fire in recent years for its laissez-faire approach to the industry, which campaigners say allowed suppliers to pollute rivers while shareholders reaped huge payouts. But ministers are currently signalling their support for holding firm, with Michael Gove, the Levelling Up Secretary, branding Thames “a disgrace” and a source close

‘We’ve done everything we can. There’s a limit, which has been reached’

‘Customers should not pay for financial engineering that has gone wrong’

to Steve Barclay, the Environment Secretary, saying Ofwat was right to stand up for households.

“We certainly don’t think customers would think it is acceptable for there to be an easing of the regulatory regime because of this company’s demands,” the source added. “The public wants to see less sewage in our waterways.”

Former singer Feargal Sharkey, now an outspoken critic of water companies, yesterday accused Thames Water’s owners of “asset-stripping” the company. He posted on X, formerly Twitter: “Not a penny of the public’s money, you hear that [Rishi Sunak]?”

The company’s nine investors include the Universities Superannuation Scheme, which manages the retirement pots of university lecturers, the BT pension fund, the Canadian teachers’ pension fund Omers, infrastructure investor Hermes and sovereign wealth funds linked to China and Abu Dhabi.

Thames has attempted to bring on board more patient investors in recent years but it has also faced added pressure from rising interest rates – which have pushed up its debt repayments – as well as flooding brought on by climate change and population growth. Investors argue that Ofwat has persistently failed to fully account for these factors, leaving the company nursing deficits that they have had to plug.

Without permission to raise bills by 40pc, they say it will be facing a £4bn black hole in the 2025-30 period – a sum too large to stomach.

“After more than a year of negotiations with the regulator, Ofwat has not been prepared to provide the necessary regulatory support for a business plan which ultimately addresses the issues that Thames Water faces,” the shareholders declared yesterday.

According to Thames executives, the company does still have options. At the end of February it had around £2.4bn in cash and borrowing facilities – enough to limp on until May 2025.

But to survive any longer, it would need to raise further debt, convince its shareholders to change their minds, or find new backers. All three of those options look like faint prospects right now, however, as fund managers dump Thames credit notes.

Yesterday, a bond linked to an entity in Thames’s byzantine structure nearly halved in value to just 16p in the pound. The IOUS, which mature in 2026, were worth as much as 87p six months earlier. Gordon Shannon, a bond fund manager for Twentyfour Asset Management, says the bond price crash suggests a “huge amount of doubt” that Thames will be able to repay bondholders.

Despite this, yesterday, sources close to Ofwat and Thames Water’s own executives insisted they still believed administration was a remote prospect. “There is a chance that somewhere down the stream you might get to a special administration outcome, but there’s still a lot of water to go under the bridge,” said Thames chief executive Chris Weston, in a seemingly unintentional pun.

If either side in the stand-off has miscalculated, it is households – not just investors – who will end up paying the price.