Major UK Water Utility Lands Itself in Hot Water: A View on the Credit Implications for the Water Utility Sector in the UK

Thames Water (TW or the Company), the UK’s largest water utility providing water and sewage services to 15 million people in London and the Thames Valley, faces significant challenges in securing additional funding. TW is burdened by crushing debt totalling GBP 14 billion, and has been plagued by a series of water leaks and sewage leakage in its system. Given the importance of the provision of water, the UK government is contemplating temporarily taking over the business using a Special Administration Regime until a new purchaser can be found. We believe that TW’s precarious situation could have implications for other water utility companies operating in the UK.

Key highlights:
-- The cost of the Company’s debt, which is tied to the retail price index, is outpacing the growth of its consumer price index-linked revenues at a historical rate, leading to growing losses.
-- Like other British water utility providers, TW faces serious infrastructure problems with water and sewage leaks, requiring significant investment in its aging infrastructure to meet regulatory requirements.
-- While TW’s owners recently made their first equity injection into the Company since its 1989 privatisation, further equity investment will be required to meet its debt obligations, otherwise the government may be required to step in.

“TW’s current unstable financial position and infrastructure problems will likely have a bearing on other sector participants, adding to sector credit risk and the ability for companies to raise capital at a reasonable cost”, said Tom Li, Vice President of Energy, Utilities, and Natural Resources at DBRS Morningstar.