The Financial Times: Thames Water's new boss faces tide of problems

Weston, a former executive at power supply firm Aggreko and at British Gas, has to convince investors nursing multimillion-pound losses that he has the management expertise and vision to put the water monopoly on a stable footing, despite ongoing regulatory uncertainty and the threat of penalties and legal fines for leakage and sewage outflows.

He takes over after the former chief executive, Sarah Bentley left the company last June, following a boardroom bust-up that sparked fears over Thames Water’s financial viability, forcing the government to draw up plans for the utility’s temporary nationalisation.

Thames Water’s overarching group is burdened with a consolidated debt mountain of £18.3bn as of March 31, up from £15.4bn the year before. It needs to refinance £1bn of debt by the end of 2024 as well as raising £3.25bn of new equity by 2030, which is needed to continue to operate and maintain the business.

There is a risk that investors — including private equity, sovereign wealth and pension funds — could object to injecting fresh equity.

There was “no certainty” that the conditions for any additional shareholder funding would be met, Thames Water warned in a prospectus issued to bondholders in October. In addition, any funding “could be vetoed by a shareholder or shareholders”, it added.

The company, which provides water and sewerage services to around a quarter of the population in England, is also facing operational pressures including poor performance on leakage and sewage discharges and an increase in maintenance costs, which is sucking up cash.

The average water trunk main — some of which are large enough to require scuba divers for repairs — is over a century old in London, or 78 years old across the region, while around 14 per cent of the oldest cast-iron pipes have been buried in the ground for 150 years, according to Thames Water.

Colm Gibson, managing director at Berkeley Research Group, said there were all the hallmarks of a “particularly eventful year for Weston, who would need to demonstrate early successes to win over stakeholders”.

The task of persuading investors to inject equity is difficult after Thames Water’s largest shareholder, the Canadian pension fund Omers, took a 28 per cent writedown on the value of its holdings in the year to March 2023. Thames Water’s second-largest investor, the USS — which represents the retirement savings of academics in the UK — has written down the value of its holding by almost two-thirds.

The USS said last week that it views its stake in the water utility as a “long-term investment” and that it has “shown willingness to commit more [funds] in the future”.

Its writedown implies that the value of Britain’s biggest water company may have fallen from almost £5bn in 2022 to around £1.9bn last year, according to Gibson, meaning that the company is seeking more in equity than it is currently worth.

Investors are waiting on a draft ruling from regulator Ofwat in June as to whether it will allow Thames Water to increase customer bills by more than 40 per cent by 2030 before they agree to inject new equity. They are also seeking limits on regulatory penalties handed down for performance failures such as sewage outflows or leakage.

Additional hurdles faced by Weston include potential court fines as a result of Environment Agency and Ofwat investigations into whether it and other water companies breached permits on sewage outflows that could cost it tens of millions of pounds. Class action claims against five companies — Anglian, Northumbrian, Yorkshire, United Utilities and Severn Trent — have been filed to the Competition Appeal Tribunal. Thames Water is expecting a similar claim, the company says in its prospectus.

One person close to an investor said they increasingly fear “any equity injection could be wiped out by inflationary cost pressures and fines for missing environmental and other performance targets”.

Another more immediate task facing Weston is the renegotiation of a £190mn loan facility held at its parent company, Kemble Water, that is due in April, and that the company is hoping lenders will agree to extend.

That loan has already led credit rating agency Fitch to downgrade Kemble Water Finance Ltd further into junk territory and may diminish capital market appetite for Thames Water debt, making it even more expensive, experts said.

Thames Water said that its regulated entity “is in a solid financial position and has supportive shareholders”. It added: “Our shareholders have also confirmed the expected need for additional equity funding”.