Water way to run a business
One of the biggest business stories of the year broke last week and turned the spotlight firmly on the UK water industry.
Specifically, what has been going on at the largest privatised water supplier and treater in the UK – Thames Water.
Serving 15 million customers across London, Oxfordshire, Berkshire and the south east, the company announced that CEO Sarah Bentley had unexpectedly resigned and shortly afterwards came news that the business required refinancing from shareholders possibly as much as £10 billion.
Thames Water was the worst performing of the water companies based on 2021/22 figures when it missed its legal requirements on how much sewage is treated, pollution and internal sewer flooding. It received £50 million in penalties by regulator Ofwat for these failures alone.
Their own figures show that currently Thames Water leaks 630 million litres of water a day, which means it’s both the worst and the highest rate of leaks for five years and won’t meet its obligations to plug them this year or next year.
Last year they received a £500 million investment from shareholders with another £1 billion promised but further discussions are ongoing. Shareholders include several pension funds as well as investment vehicles from the Chinese and Abu Dhabi governments.
Half of the £14 million debt the business owes is linked to high inflation with the company running a debt to value ratio of 80% based on interim results from earlier this year. Rising interest rates on debt is also exacerbating the issue.
A statement from regulator Ofwat said: “We have been clear that Thames Water has significant issues to address – their environmental record and leakage performance, for example, are poor. Alongside the turnaround of their operational performance, they need to improve their financial resilience too.
“But that is all in the context of a company that has strong liquidity – it recently received an additional £500m from shareholders and has £4.4bn of cash and committed funding.”
“Overall, the sector is continuing to attract international capital and is especially attractive to long-term investors such as pension funds. Indeed, there has been an additional equity injection of around £2bn since 2020, with companies acting to strengthen their financial position,” it said.
“Ofwat will continue to keep companies’ financial resilience under close scrutiny and work with companies to ensure they take action to ensure that they have the financial backing to deliver for customers and the environment.”
Companies that handle water collection, treatment and supply are businesses like any other and are classified together with firms that are concerned with sewerage, waste collection and treatment and other remediation activities.
Water company insolvencies 2019 -2023 (to end of April 2023)
|Water collection, treatment, supply
|Waste collection, disposal
|Remediation & other waste mgmt
We can see from the official figures from The Insolvency Service that although there was dip in the pandemic affected years of 2020 and 2021, last year industry insolvencies were close to their pre-pandemic levels.
If this year’s figures continue on their current trajectory then they will match 2019’s figures although all the attention would be on a Thames Water or similar large insolvency event if it occurs.
Waste collection and disposal companies are the most frequently affected followed by those responsible for remediation and other waste management.
What can they do to stop leaking money?
What are the options available to resuscitate the country’s largest water and sewerage company?
- Special Administration
The Water Industry Act 1991 has a set power to protect essential services for the public if a private company is either on the brink of insolvency or if it’s not fulfilling its legal obligations.
It arranges to transfer the business as a going concern and enables administrators to carry out the ongoing functions of the company until that transfer.
Special administration is designed to protect an essential public service first with creditors not having priority in their claims as would happen in a normal administration. As happened with Bulb energy in 2022, the company can eventually be transferred to another private company but can also be used to transfer a company into public ownership, as happened with Railtrack in 2002.
- Regional Public Water Company
Analysts think that South East Water and Southern Water are also failing financially so special administration could be used to take all three into public ownership via the councils in their region as the first regional publicly owned water company.
- Section 18 Enforcement
Under the Water Industry Act 1991, government ministers and Ofwat can issue specific enforcement orders for a company to do their bidding – so they could be forced to pay down debts, restructure the business, reduce payouts to shareholders and reduce water bills.
This would in effect be a nationalisation without any local accountability and participation but could be resisted by private owners.
- Business Failure
If the company goes into administration and ultimately liquidation then it could be taken into public control without paying a penny. However, as an essential public utility there were safeguards included in the Water Industry Act 1991 which states that ministers and the regulator are not allowed to let any water company fail.
- Shareholder funding
As part of Ofwat’s increased regulatory activities, companies were told they could not pay out dividends if it meant their financial stability suffered. Ofwat continue to closely scrutinise the financial viability of water companies based on the level of debt they hold compared to their value – Thames Water is an industry high of 80%.
Thames Water proves that no matter whether you’re a sole trader or a multi million pound business, when you run into choppy waters the best thing to do is to look for a lifebelt.
After speaking with one of our expert advisors they’ll have a clearer understanding of what options are available to them in the immediate and longer terms and what they can do to implement them to help improve their company’s chances of staying afloat.