Ritika Janiya
Heavily indebted Thames Water is in trouble over financing, after being blocked by watchdog Ofwat from hitting customers with bills for nearly £157m to close its pension gap. With time running out, the government breathing down its neck, the company now has to bear the brunt of the deficit created by its own management and shareholders.
The biggest water company in the UK, Thames Water, is being hit by a serious financial crisis, which is expected to have far-reaching effects. With a customer base of 16 million throughout London and the Thames Valley, the company is burdened by a gigantic debt of £15.2 billion. To make matters even worse, Thames Water had a scheme of charging £156.6 million from its customers to help cover a pension fund shortfall, which has just been quashed by the regulator, Ofwat.
It wanted, for instance, to transfer the pension deficit into customers’ bills, where a little of its financial burden would have been eased. On this one, nevertheless, Ofwat came promptly and declared that the customers should not assume the extra burden. The regulator believes that the management and shareholders of Thames Water should shoulder responsibility for catering to the pension deficit.
The decision has left Thames Water in a tight corner. It has been under fire for a variety of mishaps and incidents, such as leakage of sewage, faulty pipes, and payment of dividends despite the poor state of company finances. On top of all these problems, it is now being burdened with the pension shortfall; the management team, led by Chief Executive Chris Weston, faces immense pressure to find new funds to keep it running.
But now it has gotten serious to the point that Thames Water has issued a stark warning: it will run out of cash by June next year if it does not get more money. If that happens, a special administration process may be taken over by the government, where the company is plunged into. Effectively, that would mean the state taking over Thames Water, a private company, something significant and unprecedented.
The fun and games do not end with Thames Water. This spring, the company’s new owners agreed to provide £500 million of crucial investment to support the struggling firm, only to renege on the deal. They announced out of the blue that the regulatory strictures imposed by Ofwat were unworkable and rendered the company “uninvestable.” Their bombshell U-turn left Thames Water engaged in a race against time to secure alternative financing sources—it has so far been unable to do so.
In addition to its financial woes, Thames Water has been faced with issues relating to its pension scheme. The £1 billion-plus defined benefit Thames Water Pension Scheme is currently in deficit by £152 million. The pension scheme was shut to new members in 2021 and the firm had been targeting to get rid of this deficit by 2027. The valuation of the pension fund, due in 2022, is yet to be submitted.
It had put the £156.6m pension application in its business plan inside the envelope for consideration by Ofwat in its 2024 price review. The review is where water firms send their offers to the regulator about how much they should be allowed to raise bills by for the next five years to pay for work done on the network and invest in projects. Thames Water had asked for nearly £22bn but was granted only £16.9bn, with Ofwat branding their plan “inadequate.”
Ofwat dismissed the pension appeal due to the fact that the appeals of Thames Water did not provide enough supportive evidence for the customers to cover the pension deficit. The regulator thus appreciated the fact that, starting in 2023, already by that time, customers’ money was protected from being used to service pension deficits. The company also established that the management and the owners had also agreed to the financial liability from the year of 2009 during the price review.
With this backdrop, the future does not seem very bright for Thames Water. The company is highly strung in getting the money necessary to stay afloat without having to defer to the government’s special administration process. However, with all the touting going on and no real signs of a resolution in time, government intervention may be closer than that.
A spokeswoman for Thames Water said: “The company is in constructive dialogue with the pension trustees and the Pensions Regulator with a view to completing the valuation of the pension scheme.” She added that contributions relating to both the pension schemes were all paid up. With these forms of words, the financial difficulties are still pressing for concern.
All in all, Thames Water is on a precipice as it struggles to navigate its financial storm. With spiraling debt, a refused pension scheme, and the specter of government takeover hanging over its head, the company has no time to waste. The coming months will be the key to the company as it tries to not derail completely with its operations and secure a position to continue offering services to its millions of customers.
