If Labour triumphs in this week’s election, as polls suggest, then top of the incoming business secretary Jonathan Reynolds’s in-tray will be the possible collapse of Thames Water. The Thames timebomb is ticking – and could explode before new MPs have even become fully acquainted with the corridors of Westminster.
To recap, Britain’s biggest water company has been labouring under an £18bn debt mountain and has become the chief target of mounting anger from the public and politicians towards the industry over sewage spills, executive pay and shareholder payouts.
In March, Thames investors refused to stump up a pledged £500m of emergency funding amid a standoff with the industry regulator, Ofwat. So acute are concerns that the government has tasked officials with making contingency plans for a temporary renationalisation, codenamed Project Timber.
Its finances were back in the spotlight last week, when the Guardian revealed that a £150m dividend paid out from the regulated company on 27 March – hours before investors pulled the plug – was being examined by Ofwat. An internal party dossier by Labour’s chief of staff, Sue Gray, seen by the Financial Times, put the company’s potential collapse high on the party’s “risk register” after taking power, alongside prison overcrowding, bankrupt councils and an NHS funding shortfall.
One of the first tests will be the postponed publication of Ofwat’s proposals for the water industry on 11 July. The regulator had been due to release its draft “price review 24” – the process by which it determines how much each company can charge customers over the following five years – on 12 June, but the pivotal moment was delayed by Rishi Sunak’s soggy early election announcement.
Thames’s own five-year plan, submitted in October and updated in April, is at the heart of its standoff with shareholders, who fear Ofwat’s response to it will be too stringent. The company has promised an extra £1.1bn to tackle environmental issues on top of the £18.7bn already pledged, to be paid for in part by raising bills 59%, including inflation. The regulator has indicated it is reluctant to impose large increases on struggling households.
Investors will be combing Ofwat’s draft for an indication on the weighted average cost of capital it will allow companies, allowing them to calculate their returns. Last time round, some water firms successfully appealed Ofwat’s findings to the Competition and Markets Authority.
The documents will also be scrutinised to see whether the regulator will allow companies to build less than they promised, or the same projects at a cheaper cost, amid an industry pledge to spend £96bn on infrastructure, from new reservoirs to sewage treatment plants.
Thames, which serves about 16m households, is also due to publish its much anticipated annual results imminently. Sources said they were keen to examine whether the accounts, and those of the diverse collection of companies in Thames’s complex group structure, will be signed off on a going-concern basis, and whether they include a “material uncertainty” statement, as last year’s figures from parent company Kemble did. A source said the accounts were expected to be signed off at a board meeting on Friday and published by 15 July.
Investors hope the various publications could clarify the prospects for the group. Options still include a complex restructure, a debt-for-equity swap and a government-handled special administration – in effect a temporary renationalisation.
A source close to Kemble’s creditors said: “Obviously, the draft determinations are just a draft, but it will spark some activity.”
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Colm Gibson, managing director at Berkeley Research, said: “Analysts and investors should be wary of reading too much into Ofwat’s draft determinations, as there is scope for Ofwat’s position to move materially before final determinations are revealed in December.”
He added: “Water companies have proposed large increases in their investment programmes just as they will face increased competition for staff and supply chain resources from the energy industry’s net zero programme, and a new government keen to invest in schools, hospitals, transport and other national … infrastructure. It will be interesting to see how this is taken into account in prices.”
Last week, Reynolds said he “wouldn’t want to see a nationalisation” of Thames. “I think there should be a solution that involves [something] short of that,” he told an event in the City of London, without specifying what that solution might be.
Unfortunately for him, a testing financial squeeze at Thames may banish any post-victory party atmosphere before the balloons have even deflated.