U.K.'s biggest water utility faces government takeover as it sinks under debt pile

By Jamie Chisholm

CEO exits as leakage rate at highest in five years

Thames Water, the U.K's biggest water company, may be on the brink of nationalization as the government considers its options for the heavily indebted utility.

The price of 2026 bonds issued by Kemble Water Holding, the company that owns Thames Water, fell by 35 pence to 50 pence, according to Bloomberg data, as reports emerged that Ofwat, the water regulator and Defra, the environment ministry, were making contingency plans should Thames struggle to raise funds in coming weeks.

Options for Thames Water, whose GBP14 billion ($17.7 billion) of debt has left it struggling to finance necessary capital expenditure to reduce leaks and stop pollution flowing into Britain's rivers, includes a temporary government ownership, according to reports.

In a statement released on Wednesday, Thames said it had received GBP500 million of new funding from its shareholders in March 2023 and "is continuing to work constructively with its shareholders in relation to the further equity funding expected to be required to support Thames Water's turnaround and investment plans."

"Ofwat is being kept fully informed on progress of the company's turnaround and engagement with shareholders," Thames added. Ofwat and Depfra had not responded to MarketWatch's request for comment by time of publication.

Thames Water Chief Executive Sarah Bentley stepped down with immediate effect this week after a freedom of information request showed the leakage rate from Thames Water pipes -- which she had pledged to reduce as part of an 8-year plan -- is at the highest level in five years.

Thames, which services mostly London and the South East of England, is owned by a collection of pension, private equity and infrastructure funds, including the Ontario Municipal Employees Retirement System, with 31.8%, Hermes on 8.7% and the China Investment Corporation with a similar holding.

The water company was first listed on the stock market in 1989 as part of the Thatcherite sale of government assets, and was taken private by German utility RWE in 2001. In 2006 RWE sold Thames to a consortium led by Macquarie Group, which who subsequently sold stakes to various investment firms.

Activists in the U.K. -- such as fishing enthusiast Feargal Sharkey, erstwhile lead singer of punk band The Undertones -- have long complained that Thames and other water utilities have prioritized investor returns to the detriment of sustainable water management.

Worries about Thames has not infected the market more broadly, analysts noted.

"Investors shrugged off drama in the water sector with reports that Thames Water might have to be placed into temporary public ownership. While it is not a listed business, such news would normally cause investors to speculate what might happen to other companies in the sector," said Russ Mould, investment director at AJ Bell.

"Shares in United Utilities , Severn Trent and Pennon barely moved, suggesting that investors see Thames Water as a company-specific problem (drowning in debt) rather than the start of broader trouble," Mould added.

-Jamie Chisholm

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06-28-23 0930ET

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