Shareholders of Thames Water, one of Britain’s largest utilities, are refusing to inject more money into the beleaguered company, throwing its future further into doubt.
The nine investors, which include the Ontario Municipal Employees Retirement System (OMERS) and British Columbia Investment Management Corp. (BCI), were supposed to provide more than £3-billion ($5.15-billion) in funding over the next five years, with an initial £500-million due March 31.
However, the investment was conditional on Britain’s Water Services Regulation Authority, or Ofwat, approving Thames Water’s business plan, which included a steep increase in customers’ utility bills, the forgiveness of some fines for pollution and an agreement that the company can continue paying dividends.
In a statement Thursday, the investors said that “after more than a year of negotiations with the regulator, Ofwat has not been prepared to provide the necessary regulatory support.” As result, “shareholders are not in a position to provide further funding to Thames Water.”
For investors, the British regulatory framework has been the most significant of several factors that have put huge pressure on Thames Water and led to the current impasse after years of negotiations, according to Michael Hill, the global head of infrastructure for OMERS.
“Simply put, after years of not taking a dividend, shareholders can no longer invest money into a business where it has become clear that we will never get it back,” Mr. Hill said in an e-mailed statement. “We are deeply disappointed by this outcome and the position that the regulator has taken.”
OMERS and BCI are both among Canada’s largest pension fund managers, overseeing $129-billion and $233-billion in assets, respectively. The investors in Thames Water are bracing for further write-downs on the value of their investments and consider their decision not to invest further to be final at this stage, according to two sources with knowledge of the discussions.
The Globe and Mail is not identifying the sources because they are not authorized to discuss details of the investment.
The announcement has put further financial pressure on Thames Water and its related companies, which are already buckling under £18.3-billion in debt.
Thames Water, like all water utilities in England, was privatized by the Thatcher government in 1989. The debt has been piling up ever since as the company borrowed to pay for upgrades to its water and sewage infrastructure.
Among the more pressing concerns is a £190-million debt payment due April 30 from the utility’s parent company, Kemble Water Finance Ltd. On Thursday, Kemble said it won’t be able to make the payment “absent an investible proposition for the shareholders to provide new equity.”
Under the company’s complex ownership structure, much of the debt is held by Kemble, which relies on dividends from Thames Water to make payments.
Thames Water said Thursday that it plans to “pursue all options to secure the required equity investment from new or existing shareholders.” The company added that it has £2.4-billion in cash and unused lines of credit that will allow it to continue operating until May, 2025.
“I’d like to reassure our customers that, despite this announcement, it is business as usual for Thames Water,” chief executive officer Chris Weston said.
In an interview with the BBC, Mr. Weston said the company is still in talks with Ofwat about the business plan. “That is a process that will go on until the end of this year,” he said. “And that creates a business plan that shareholders and anyone who might provide equity can look at and then determine whether they are going to inject equity into Thames.”
But the shareholders made it clear Thursday that they have run out of patience with the talks.
“These discussions led to the submission of a business plan which included the largest-ever investment program by any U.K. water company – over £18-billion – to improve customer service and environmental standards,” they said in their statement. “This was a solution which addresses the root cause of Thames Water’s challenges without the need for any taxpayer funding.”
One source with knowledge of the negotiations said the relationship between Thames Water and Ofwat has deteriorated over time.
OMERS has a 32-per-cent stake in Thames Water, while BCI owns nearly 9 per cent. But OMERS has partners in its investment, which makes its direct exposure to losses somewhat lower, according to two sources with knowledge of the investment terms.
Mr. Hill said the outcome for OMERS “will not impact our ability to pay pensions in any way.”
In a statement, Ofwat defended its price control system, saying it “will put customer and environmental priorities at the heart of the water sector.” The regulator added that “we also need to see companies deliver the performance that customers expect and that they are run in a way that meets customers’ expectations.”
The announcement from Thames Water “means the company must now pursue all options to seek further equity for the business to turn around the performance of the company for customers,” Ofwat added.
There have been fears for months that Thames Water could face insolvency and be forced into special administration by Ofwat. That would allow the company to restructure its debt, but it could also lead to nationalization. There are reports the government has been drawing up plans to step in if Thames Water’s finances worsen.
The utility, which serves about 15 million households in London and southern England, is also reeling from a report this week that found the number of raw sewage discharges into rivers and the sea by all water companies hit a record in 2023. Some 464,056 spills were recorded last year, up 54 per cent over 2022, according to figures from the Environment Agency.
Thames Water was fined £73-million last year for missing targets on pollution, leakage and supply interruption. It was expected to be hit with further penalties this year.
The company has also faced questions from Ofwat about a £37.5-million dividend paid to Kemble last year.
The regulator introduced a new licensing requirement last May that said companies could only pay dividends after considering service delivery for customers and the environment. Thames Water has insisted that no dividends have been paid to outside shareholders for years and that the £37.5-million payment was to help Kemble pay its debt.
Paul Waldie
James Bradshaw