Thames Water is making waves once again with renewed discussion around a potential special administration for the beleaguered water company. We wrote last year about reports that the government and Ofwat were making contingency plans for Thames Water after its failure to raise shareholder funding to bridge a funding gap with nearly £1.4bn of its borrowings due to mature this year. Now it appears that Thames Water is lobbying the government and Ofwat to loosen its controls to allow the company to increase bills to plug the gap, while also seeking permission to pay dividends to shareholders and to reduce its fines to avoid insolvency. 

Thames Water is the UK’s largest water company and serves 25% of England, so any insolvency would have far-reaching ramifications with tax-payers left footing the bill. One of the measures requested by Thames Water aimed at avoiding a collapse is the ability to increase customer water bills by 40% between now and 2030, which, while it might avoid the immediate bill associated with an insolvency, feels a bit like a tax-payer subsidy through the back door. However, without any concessions from the government or Ofwat, it seems inevitable that Thames Waters’ shareholders will refuse to provide further funding to continue to prop the company up. New rules introduced last year prevent water companies with poor financial records from paying dividends to shareholders, and Ofwat is currently considering whether to fine Thames Water for a £37.5m dividend to its parent company Kemble Water in October. Kemble is reportedly reliant on dividends from Thames Water to service its own debt, so any fine levied or attempt to clawback the dividend paid could result in the administration of both Kemble and, subsequently, Thames Water.

So what would an insolvency look like for Thames Water? 

The government passed new legislation last week designed to update the process of dealing with the insolvency of regulated water companies, which has been seen by some as an indication of a potentially imminent collapse. The Water Industry Special Administration Regime (the “Regime”) applies to regulated water companies, which can enter special administration on the application of the Secretary of State or Ofwat, in a similar fashion to the special administration of energy provider, Bulb, in 2021.  The new changes to the Regime are designed to facilitate the rescue of a water company by allowing them to restructure debts, rather than requiring the business to be transferred wholesale to a new owner. In particular, water companies can also now make use of both schemes of arrangement and Part 26A restructuring plans as tools to restructure their debts; both of these measures are designed to rehabilitate businesses and allow them to continue operating as a going concern. It seems likely, therefore, that the rescue of Thames Water would be the aim of any special administration but whatever comes next will be unchartered waters.