Thames Water faces sink or swim moment as debt crisis deepens
A key portion of Thames Water’s £14bn debt pile has crashed to a record new low in the clearest sign yet that investors are abandoning the embattled group.
Fund managers who own Thames debt have been dumping some of its riskiest IOUs in recent days over fears the company could fail to repay the debts.
A bond linked to an entity in Thames’ byzantine debt structure has crashed by 20pc in value over the last fortnight. The bond, which is linked to a company called Thames Water (Kemble) Finance, is now worth 40p in the pound, down from a price of 50p. They were worth as much as 87p six months ago.
While having no immediate impact on the group, or consumers, the bond market tremors are a sign investors believe that Thames Water could be heading for a further financial squeeze.
“The market is telling you that there is a high probability that these bonds don’t get repaid,” says one investor.
Thames is Britain’s largest water company with 15m customers. But the utility giant has been hamstrung in recent years by its complex debt structure.
It has £14bn of debts against £19bn of equity, according to most recent figures, meaning it has borrowed almost as much as investors have put in. This high leverage makes the company vulnerable to the whims of investors and banks.
Rising interest rates have put intense pressure on Thames as its debt repayment costs have increased rapidly.
Thames Water was handed a £750m lifeline from shareholders in July to stave off nationalisation, but bosses have admitted the company may need £2.5bn between now and 2030 to remain viable. Will it be able to raise the money?
As well as financial concerns, campaigners such as former Undertones frontman Feargal Sharkey have also taken aim at the company over its environmental record.
Figures released last week showed the amount of sewage Thames dumped in London’s rivers rose by nearly five times last year versus 2022.
The gloomy backdrop underscores the challenges facing chairman Sir Adrian Montague and new Thames chief executive Chris Weston.
As the architect of New Labour’s Private Finance Initiatives (PFI) projects in the late 1990s, Sir Adrian helped usher in an era when deep-pocketed private investors ploughed money into public services.
Known as a fixer in Whitehall, Sir Adrian was parachuted into Thames in June to draw on his deep experience balancing the twin demands of the City and Westminster.
His experience will be valuable as Thames faces pressure from regulators, politicians, debtors, shareholders and campaigners alike.
Weston was the former chief executive of Aggreko and is well regarded in City circles for leading the power group successfully for seven years.
In a sign of intent last week, the duo moved to reshuffle a small portion of Thames’ debt mountain.
The company raised £850m of debt from investors at the same time as buying back £500m of existing debt. Orders for the bond were oversubscribed.
A bond investor said the sudden refinancing showed Thames was trying to get on the “front foot” to build momentum in the market ahead of a difficult year.
“It does show a degree of confidence at the regulated level. If it had not been subscribed to, it would have been a real kick in the teeth,” they said.
Tellingly, the bonds were priced at a more attractive price than they could have been, offering a small discount to the value of other Thames bonds.
TwentyFour Asset Management partner Gordon Shannon said the discount was an attempt to lift some of the gloom over the Thames name.
“Clearly Thames are giving a level of concession because there’s more than a little bit of a stink around the name,” he says.
However, the debt reshuffle is relatively small beer.
Shannon says: “While issuing longer dated debt is helpful at the margin in pushing some of their issues down the road, what Thames really needs is a fresh equity injection.”
Thames has a complex structure, with a regulated operating company called Thames Water Utilities running the network and several companies dubbed Kemble – named after the source of the River Thames – raising money to invest in the network by borrowing from bond markets.
Money flows back from Thames to Kemble but there are concerns about how much will trickle up in future. Ofwat launched a recent investigation into a £37.5m dividend payment that may have flouted regulations.
The bond slide last week signals that markets fear payments to bondholders could be choked off.
A Thames Water spokesperson said: “Thames Water Utilities is in a solid financial position and has supportive shareholders. Our shareholders have already invested £500m of new equity in March 2023. In addition, they have agreed conditionally to provide a further £750m in new equity during the remainder of AMP7.
“The conditions to be satisfied include shareholder approval of the three-year refocused turnaround that will deliver targeted performance improvements for customers and the environment, and a PR24 business plan that has regulatory support.
“Our shareholders have also confirmed the expected need for additional equity funding, in the region of £2.5bn in AMP8. In aggregate, this would equate to total equity investment of £3.75bn, the largest equity support package ever proposed in the UK water sector.”
With shareholders like USS and OMERS having already ploughed £750m into the group over the summer, the question remains whether they will ride to the rescue once again or throw in the towel. Both groups have written down the value of their stakes in the utility recently. This week’s bond slide may prompt a further reassessment of Thames’ value.
One solution to the crunch may be to sell off some assets, such as the naming and branding rights for “Thames Water”, or to sell off swathes of UK land owned.
Thames licences its logo to companies such as HomeServe, so there also could be scope to make money from a sale. Sir Adrian and Weston will be weighing up how to fix the stink around Thames.
“It’s basically a game of chicken between the Government and the shareholders now on allowed returns versus the need for investment,” says the bondholder.
Thames needs to fix its leaks quickly.
The Telegraph
EDF’s UK woes pile pressure on nuclear push at home and abroad
When in 2016 France’s EDF signed up to build Britain’s first new nuclear power plant in two decades, defenders of the costly Hinkley Point C project included Emmanuel Macron, then economy minister.
“If we believe in nuclear power, we have to do Hinkley Point,” France’s now president told a parliamentary enquiry, rejecting some lawmakers’ concerns that state-backed EDF, which was already struggling to deliver a new French prototype plant in Normandy, may not have the financial bandwidth to take on the British site, originally estimated to cost £18bn.
Eight years on, with cost overruns surging at Hinkley due to repeated delays and EDF on the hook for at least another £5bn on top of previous budget revisions, Macron’s government is on a mission to ensure the French nuclear operator can indeed withstand the fallout — and keep on top of ballooning investments and orders at home.
French ministers are trying to get the British state to stump up some support for the soaring Hinkley bill, which could reach a total of £46bn at today’s prices for the two reactors, people close to the talks have said.
That would be roughly double the original budget in 2015 prices, compared with an EDF project in Finland that ended up costing more than twice what it was supposed to and a plan for one reactor at Flamanville in France that is running four times over budget, at €13.2bn.
But the Hinkley setbacks have also revived a core strategic question that is becoming more pressing than ever for EDF, a former French electricity monopoly that operates Europe’s biggest fleet of 56 domestic reactors: whether it is equipped to handle multiple projects at once, internationally and at home, and financially as well as from an industrial perspective.
Already an issue in 2016, when French labour unions at the group opposed the Hinkley plans on the basis that the financial set-up was risky, this tension now has a different edge to it.
Climate concerns are fuelling a revival of the low-carbon technology globally. In France alone Macron has committed EDF to at least another six new reactors, which could even rise to 14 or more in the coming decades — a huge change after a tiny trickle of orders since the Fukushima disaster of 2011.
EDF, meanwhile, is only just emerging from one of the worst periods of financial turmoil of its 78-year history: outages at French plants led it to a near €18bn loss in 2022, and the group, with debts already reaching €65bn, was fully renationalised last year.
Its chief executive Luc Rémont, appointed just over a year ago, has not missed a chance to remind politicians EDF’s day-to-day investment needs are now €25bn a year to cover work on existing plants and to prepare a massive recruitment drive for the plants to come — a sum that does not even cover the construction costs that will be needed.
This burden has made the Hinkley problems Rémont has inherited even more unwelcome, at a time when he has tried to make headway for the group with a deal with the French state for future electricity prices a decent margin above its production costs. This would allow EDF to finance some investments itself without even more debt or state help.
Hinkley Point C will now not see the light of day until at least 2029, when teams of engineers and other staff that France is also counting on will be stretched for longer in Britain.
“As long as you have a project running, you are doubly punished. You’re paying for a project to be completed and not generating new revenues,” said Denis Florin, an energy specialist at Lavoisier Conseil.
For now, however, EDF is doubling down on the argument that doing more plants at once will ultimately be beneficial.
The thinking is that it can get to a cookie-cutter level of construction for the complex reactors, with teething problems ironed out and design issues resolved. This would help not only other projects it is aiming for in Britain like the £20bn Sizewell C reactor but also its ambitions from India to the Czech Republic.
“We need to be present at scale,” Rémont told reporters in November. “Like in all industries you’re looking at a massification effect to become more competitive, and that’s something that has not been possible in the past 20 years in the nuclear industry because there were too few projects.”
Click here to keep reading this feature in The Financial Times
Octopus in talks to help power Ukraine after Russia smashes grid
British energy supplier Octopus is in talks to help power Ukraine as the country rebuilds its electricity grid following Vladimir Putin’s bombing onslaught.
The company has held exploratory talks with Kyiv-based DTEK, Ukraine’s biggest private energy company, about how the two businesses can work together.
It is understood this could potentially include Octopus licensing its groundbreaking Kraken energy management software to DTEK or even going one step further and forming a joint venture with the company, as Octopus has done with energy providers in other markets such as Japan.
The discussions come amid a long-running Russian bombing campaign to target Ukraine’s energy infrastructure, with the aim of depriving the public of power or heat during the coldest winter months.
Russia’s efforts have galvanised support in Ukraine for renewable energy, with the more distributed nature of wind turbines and solar panels making them smaller targets than large coal power stations.
Greg Jackson, chief executive of Octopus, held initial discussions with Maxim Timchenko, DTEK’s chief executive, on the sidelines of the World Economic Forum in Davos, Switzerland earlier this month.
Both men stressed talks are at an early stage but were enthusiastic about the potential for cooperation.
Mr Timchenko said: “We want to learn from this company and we want to bring this innovation to Ukraine.”
A potential deal between the two would mark yet another foreign expansion for UK household supplier Octopus, which already operates Germany, the US, Japan, Spain, Italy, France and New Zealand as well.
Many of the company’s global agreements have been propelled by demand for its Kraken software, which can manage energy assets such as wind turbines as well as customer service databases.
Kraken is now used by utility companies in 17 countries to serve 54m users.
Mr Jackson said: “Ukraine – and DTEK – has shown the agility, the speed, at which you can both upgrade and build new electricity infrastructure.
“We can learn a lot from them, for example about how they’ve been able to so quickly and so impressively do work – often under fire – that in the UK often takes five to 15 years. And if you take a decentralised system like they’ve been building, I think it’s a good example of the kind of situation where Kraken can be very effective.
“I can’t preempt where it goes. But let’s just say, I’d be delighted if we can find a way to work together in Ukraine, and in the rest of Europe.”
Following its takeover of Shell Energy last year, Octopus is now Britain’s second-biggest energy supplier with about 6.6m customers.
DTEK, meanwhile, is one of Ukraine’s biggest electricity suppliers with about 3.5m customers across the Kyiv, Donetsk and Dnipro regions.
Since the outbreak of war with Russia, the company has been scrambling to bolster its electricity grid with decentralised wind and solar farms.
It won plaudits last year for completing the construction of a wind farm in southern Ukraine, 60 miles from the frontline, in just nine months.
DTEK has also begun building renewable energy projects outside of Ukraine, with schemes online in Romania and others planned in Italy, Poland and Croatia.
Mr Timchenko said DTEK was keen to look at opportunities to deploy Octopus’ Kraken software across the business, as well as the potential for a joint venture between the two companies.
There was potential to test Octopus’ technology “outside of Ukraine as well”, he added.
The Telegraph
Scottish Water plans to push domestic water bills up 30%
Household water bills may rise by almost 30 per cent over the next three years under plans made by the state-owned utility provider.
Scottish Water intends to increase its bills by 29 per cent, with three successive annual rises of 8.8 per cent starting in 2024-25.
Water charges are added to the bills for council tax, which has been frozen by the Scottish government in response to the cost of living crisis.
The three-year rise suggested by Scottish Water, according to proposals leaked to the Sunday Mail, would result in people in council tax band D properties paying £617 for water and sewerage a year, an increase of £139. The plans, which are yet to be finalised, need regulatory approval.
Alex Plant, chief executive of Scottish Water, who was hired from a privatised English water company, forgot exactly how big his salary was when questioned by MSPs last year.
A source said: “On December 12 the board took the decision to increase charges for water and waste water by 8.8 per cent for 24-25 and the same for the following two years. This means a 29 per cent cumulative increase over the next three years. On its own the 24-25 increase would be nearly 5 per cent above inflation.
“New chief executive Alex Plant, who claimed not to remember his own salary when he appeared before Holyrood’s net zero committee, is pushing these huge increases. He came in from Anglian Water in April and wants to follow what’s happening in England on charges.
“The Scottish government is still considering whether to ask the board to reconsider its decision as it did two years ago. In the meantime Scottish Water’s plan is to go ahead with the 29 per cent, while council tax is frozen and in a cost of living crisis.”
The Scottish firm must inform the government of its plans and needs approval from its watchdog, the Scottish Water Commissioner. Water bills have in the past been frozen.
In October Humza Yousaf, the first minister, announced plans to freeze council tax, which experts say could cost local authorities £183 million, risking more cuts to library services and closures of sporting and cultural facilities.
Twenty-seven of Scotland’s 32 councils have reported that they need to make millions in savings to balance the books, with a combined shortfall for all councils for the 2024-25 financial year at £531.7 million.
Jackie Baillie, deputy leader of Scottish Labour, has repeatedly asked for the government to help keep household bills down.
Asked about the latest price rise proposals, she said: “This is yet another shocking water price hike on struggling Scots during a cost of living crisis. While Scottish Water top brass are still getting eye-watering wages and massive bonuses, action must be taken to ensure the people of Scotland do not pay the price.
“The Scottish government should cap the proposed rise and Scottish Water should use their reserves to give Scots a water tax rebate and lower water charges now.”
A spokeswoman for Scottish Water said: “The process of agreeing the annual scheme of charges for 2024-25 with our economic regulator is ongoing. Affordability and investing for the future remain key considerations when the Scottish Water board proposes charges on an annual basis, in line with our regulatory settlement. We will publish charges for the forthcoming year once this process is concluded.”
The Times
Tragedy as woman dies while trying to top up electricity in horrific fall from ladder
A woman died after falling from a ladder whilst topping up her electricity meter at home an inquest has heard.
Bernadette Faulkner, 80, fell from a stepladder whilst attempting to reach her flat’s prepayment meter in Bloomsbury on December 2, 2022.
Following an inquest into Mrs Faulkner’s death, a prevention of future deaths report has been issued. The report criticised both the placement of Ms Faulkner’s meter and similar devices in other homes.
Coroner Ian Potter wrote that Mrs Faulkner, who was 4ft 10ins tall, was living in a converted Victorian townhouse rented from Camden Council when the incident occurred.
They said: “On December 2, 2022, Mrs Faulkner purchased credit for her electricity meter and then climbed the stepladder to put the credit onto the meter.
“In trying to access the meter she fell from the ladder and landed on the floor, where she was discovered some hours later by neighbours.”
Mr Potter criticised the placement of the meter seven to eight feet above the floor of Mrs Faulkner’s flat. He said, “She had no choice but to access the meter using a stepladder every time she wished to add credit to her pre-payment meter”.
Mr Potter called for changes to the position of new meters which should extend not just to new buildings, but to older flats like Mrs Faulkner’s.
He explained: “There appears to be no industry standard requiring electricity meters to be easily accessible (albeit secure) by all potential customers, except perhaps in newly built properties. In my opinion, action should be taken to prevent future deaths and I believe you have the power to take such action.”
Following Mr Potter’s report, a spokesperson for energy regulator Ofgem said: “Our thoughts are with Bernadette’s family and friends after this incredibly tragic incident. We expect suppliers to carefully consider whether their customers’ meters are safe and appropriate for them to use, and to proactively identify if a customer may be vulnerable and in need of further support, and if they are eligible to join the Priority Services Register (PSR).”
They added: “If a consumer cannot easily access their meter or is experiencing any challenges in viewing, topping up, or operating it, they should speak to their supplier as soon as possible so they can get the support they need and discuss the alternative options, which could include their meter being replaced or relocated.
“If a customer is unhappy with how their situation is handled by their supplier, they can raise a complaint with the Energy Ombudsman.”
In a separate statement, Mrs Faulkner’s former landlord Camden Council they were “very sad” Mrs Faulkner “lost her life in this way and our deepest sympathies are with her family and friends”.
The council said they would give “careful consideration to the coroner’s report” to make sure they are “doing all that we can for our tenants” experiencing the same problem.
Utility Week’s weekend press round-up is a curation of articles in the national newspapers relating to the energy and water sector. The views expressed are not those of Utility Week or Faversham House.