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Thames Water has expressed doubt about its ability to avoid temporary nationalisation, as the heavily indebted utility sank to a £1.65bn loss for the year.
The company, which has been battling to secure new investment from a group of creditors, said in its annual accounts published on Tuesday that it faced “material uncertainty” over whether it can complete a “recapitalisation transaction”.
It added that if it failed to do so it would need to “consider all options” but that a possible consequence would be “special administration”, which would make it the first water company to face temporary nationalisation since utilities in England and Wales were privatised in 1989.
The UK’s largest water utility — which provides water and sewerage services to about a quarter of the UK population — is struggling under a near-£20bn debt mountain and is working towards a backup £5bn rescue plan with its senior creditors.
The creditors’ plan is the only one left after US private equity firm KKR walked away from a rescue plan last month, and is currently being considered by the regulator, Ofwat.
Thames Water confirmed that these top-ranking “class A” creditors are “engaging in intensive and detailed discussions with Ofwat and other stakeholders to seek to agree revised regulatory arrangements”.
The Financial Times previously reported that the government had rebuffed an attempt by the Thames Water’s creditors to secure less burdensome regulation and shield the business from environmental laws.
In a statement on Tuesday, chief executive Chris Weston said the creditor’s rescue proposal “will come with a requirement to reset the regulatory landscape and acknowledge it will take at least a decade to turn Thames around”.
Thames Water chair Sir Adrian Montague told parliament’s environment select committee on Tuesday that the company was in a “reasonably strong position” despite KKR withdrawing from the process and the creditor proposal was “in good shape”.
“We hope they will reach a conclusion with Ofwat very soon,” Montague added.
In its annual results published on Tuesday, Thames said it had swung to a loss of £1.65bn in the year to March 31, from a £1.6mn profit in the previous year.
The majority of the loss came from a £1.2bn impairment on an intercompany loan. But it also stemmed from £285mn of “exceptional finance costs” — the bulk of which constitutes fees paid to lenders — and £65mn paid out to advisers on its equity raise and debt restructuring.
Thames also noted a rise in the number of pollution incidents, which increased 34.3 per cent from the year before and were caused by significant rainfall. It added that it had made progress on the “underlying causes of our poor performance”.
Weston said: “While it is disappointing this work was not reflected in performance improvement in the year, we are confident that it will translate into future environmental performance.”
Thames Water’s so-called gearing ratio, a measure of its debt-to-assets, rose to 84.4 per cent from 80.6 per cent a year earlier. This level, which does not include further debt at the group’s parent company, makes Thames Water the most indebted water utility in England and Wales.
Thames Water also confirmed that it had restated its cash flows reported last year, partly due to an “error” and an accounting change following an enquiry from the Financial Reporting Council.
Thames Water said the restatements had no impact on its reported profit, net cash flow, cash balances and liquidity, adding that its debt covenants were also not affected.
For the second-year running, Thames Water’s auditor PwC warned that there are “material uncertainties which may cast significant doubt” on the utility’s “ability to continue as a going concern”.
Montague insisted on Tuesday that KKR gave no reasons when it told Thames Water’s management it was withdrawing from the process on the evening of May 29.
In a letter to the committee, Tara Davies, KKR’s co-head of Europe Middle East and Africa, said the firm felt it “would not be able to manage and meet the understandable expectations on the timing of improvements, risking falling short in the eyes of the public and stakeholders”.
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