Utilities that may need taxpayer bailouts After racking up £14bn in debtable to circumvent Ofwat rules that prevent financially troubled companies from paying shareholders.
Experts claim the crisis “could have been avoided” had safeguards been put in place, while campaigners have accused Ofwat of “dizzying incompetence”.
The rules, known as “cash locks,” are designed to prevent money from being siphoned from the water company if its debt levels reach dangerous levels.
They’re designed both to keep the water utility viable and to prevent owners from siphoning off capital if the business is on the verge of bankruptcy.
The rules come into effect if credit-rating agencies determine that any business or affiliate is in precarious financial condition.
In 2019, the rating agency Fitch downgraded the ratings of two subsidiaries of Thames Water to B, which means “significant default risk” and “limited margin of safety”.
This would have met the threshold for triggering a “cash lock-up” for affiliated companies, but according to Ofwat, these businesses are not within its remit and therefore the rules do not apply.
Thames Water said the two companies did not issue debt on behalf of the parent company, so they were subject to regulatory constraints, although the company’s own annual report described their role in raising funds for the wider group.
In 2021 and 2022, Thames Water paid out £70 million in dividends to shareholders. The company has numerous foreign shareholders, including Abu Dhabi and Chinese sovereign wealth funds.
Dr. Kate Bayliss, Research Assistant at SOAS, University of London, said I: “Ofwat seeks to create rules by restricting core companies to enhance financial resilience, and perhaps the current consequences could have been avoided if a stricter lockdown had been imposed at an early stage.”
Adrienne Buller, director of research at think tank Common Wealth, said: I: “These new findings show that regulators simply cannot enforce basic checks and balances at the expense of households. making Britain an extreme exception.
“This model is a ticking time bomb – it is long overdue to get rid of it and restore public ownership”.
In response IAn Ofwat insider said their rules were designed to protect the regulated part of the business from any problems with the companies involved, but Ofwat was not accountable to the holding company.
Thames Water is the UK’s largest water company with over 15 million customers. Privatized in 1989Investors have injected money into the company only once in the 34 years it has been privately held, last year they injected £500m to ensure its continued viability.
During that period it paid out more than £2bn in dividends while carrying debts of up to £14bn, discharge sewage into rivers Tens of thousands of times a year, and tens of millions of pounds in fines.
Pop star-turned-river activist Fergal Sharkey tells us I Ofwat needs to act to stop taxpayers footing the bill.
“Just when you thought the Ofwat couldn’t get any more depraved, they took the level of incompetence to dizzying levels that humanity has never broken through before,” he said.
“Thames Water removes the dirty linen from the dining table and hides it in a cupboard downstairs, hoping Ofwat never notices. Ofwat needs to sanction this company now, they need to accept the power and authority they have Before the taxpayer bears the tax liability“.
In a statement, Ofwat said it would “continue to closely monitor the financial resilience of businesses”.
Thames Water was contacted for comment.
How are multiple companies under Thames Water related
The two subsidiaries raising capital for Thames Water are Kemble Water Finance Ltd and its direct subsidiary Thames Water (Kemble) Finance Plc.
Both are an important part of Thames Water’s transfer of funds, according to Thames Water’s annual report.
Since 2019, credit rating agency Fitch has downgraded its debt rating to B, implying a “material risk of default” with a “limited margin of safety”.
If either of the two subsidiaries were treated by Ofwat as an associated company under the legal license under which the company operates, it would trigger a cash lock and prevent dividend payments.
The legal license specifies that the company must ensure that it and “any affiliate that issues the company’s debt on its behalf maintains at all times an issuer’s credit rating, which is an investment-grade rating.”
Although these companies play an important role in financing Thames Water’s ongoing operations, they are considered by Ofwat to be unregulated businesses and therefore do not trigger cash locks.
In Thames Water’s own annual report, Kemble Water Finance Plc was described as a “playing[ing] Play a key role in maintaining access to equity capital provided by shareholders by underpinning the confidence of lenders and credit rating agencies.”
The company describes itself as: “borrowing, either directly or through its direct subsidiary, Thames Water (Kemble) Finance plc (“TW(K)F”), for wider group intra-group use.”