Thames Water’s £57 Million Penalty Adds to Cash Woes

(Bloomberg) -- Thames Water Utilities Ltd. was slapped with a penalty of £56.8 million ($74.4 million) by its regulator, just as the beleaguered UK supplier seeks billions of pounds in equity to avoid going into administration.

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Despite some improvements, Britain’s largest water and sewage company recorded the largest fine in Ofwat’s annual review of the industry published Tuesday. It missed targets on stemming chronic leaks and sewage spills in the year through April.

For Thames, the situation is dire. It only has enough money to last until the end of May and is in talks with a group of creditors holding about £10 billion ($13.2 billion) of its debt over a potential rescue package. It’s also desperately seeking new investors to provide £3.3 billion in new equity.

The utility is seen as too big to fail, and without new funds it would likely be temporarily nationalized. Existing investors want to avoid the special administration process because a prolonged period under government control could mean they recover less of the money they lent. Politicians also are not keen to use taxpayer money to bail out the beleaguered company.

Helen Campbell, senior director for sector performance at Ofwat, urged caution over improvements at Thames. The company’s rebate was almost half that of the previous year, because of improvements in drinking water quality and leakage.

“Thames’s problems are deep rooted and there is a lot of work that Thames needs to do to turn its business around,” Campbell said in an interview. “So whilst it’s welcome to see that they’ve achieved in this one year an improvement on some of their performance indicators, the management team has got a lot to do to get that business where it needs to be.”

The penalties come as water and sewage companies face mounting public anger for their plans to raise customer bills by £144 on average over the next five years. The utilities are trying to fund a £105 billion investment program over that period to improve performance and bolster networks against climate change and population growth.

“Money alone will not bring the sustained improvements that customers rightly expect,” said Ofwat Chief Executive Officer David Black. “It is clear that companies need to change and that has to start with addressing issues of culture and leadership.”

The regulator instructed the industry as a whole to return £157.6 million to customers. Southern Water, another heavily indebted utility, was fined £31.9 million.

“This might sound like a lot of money but frankly it is a drop in the ocean for polluting water companies that have handed billions in dividends and interest payments to investors,” said James Wallace chief executive of environmental campaigner, River Action.

Since privatization in 1990, water company shareholders have withdrawn dividends with a cumulated real value of £72.9 billion, according to researchers at Greenwich University

Penalties imposed on water companies have a direct impact on returns for investors who have put in equity on the expectation that it will eventually be recouped through customer bills.

Thames’s poor performance means it will have returned £256 million since 2020. That’s more than half the total industry rebate of £431 million during the price review period.

UK water companies have struggled to upgrade aging infrastructure amid high interest rates in recent years. The industry saw its worst year for sewage spills since 2020, said Ofwat, adding that the number of incidents has only fallen by 2% over that period compared with a target reduction of 30%.

Thames still had the worst leakage rate per customer in 2023 to 2024, according to a separate report by the Environment Agency on Monday.

“While our performance penalty value is among the highest in the sector, this reflects that Thames Water has three to four times more customers than other water companies, so our penalty rates are set proportionally higher,” a Thames Water spokesman said.

He added that Thames had seen the largest cut in year-on-year penalties and said the improvements show its turnaround plan is starting to work.

(Updates from seventh paragraph with new details)

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