Thames Water has agreed a payment plan with the industry regulator for fines it owes worth £123m, as it races to secure funding to avoid temporary nationalisation.
The utility company, which serves 16 million customers across London and the south-east, is trying to pull together a deal to avoid collapse.
The debt-laden utility company was hit with a record £104m fine by Ofwat in May over environmental breaches involving sewage spills, after failing to operate and manage its treatment works and wastewater networks effectively.
At the same time, a further £18.2m fine was levied on Thames for breaking dividend rules, the first penalty of its kind in the water industry. Ofwat said the company had paid out cash to investors despite having fallen short in its services to customers and its environmental record.
The penalties were originally due to be paid by 20 August but the regulator has given the company some breathing space to pay the fines.
Thames Water has been trying to raise money for a turnaround plan for the past year, after building up a net debt pile worth £17.7bn under successive private owners.
The company won court approval in February for a debt package of up to £3bn to fund it through this year, but it must raise billions of pounds more in new equity to try to fix its leaking pipes and malfunctioning treatment works.
Thames Water’s senior creditors have control of the business after shareholders wrote down the value of their stakes to zero. The creditors have offered a £5bn package of equity and new debt, while writing off between 20% and 30% of the existing debt.
However, negotiations over the equity investment have stalled in part because of the problem of fines. The creditors have insisted that Ofwat must grant regulatory leniency to reduce the future burden of fines. Without investing, Thames Water is expected to continue to rack up fines.
Talks between the creditors and Ofwat have progressed slowly throughout the summer, although one person involved in the process suggested that the terms could be agreed in September, for signoff in October.
Yet any proposals for regulatory easement will require government approval. The environment secretary, Steve Reed, told parliament in June that the government would reject any “regulatory easements”, and that he was stepping up preparations for special administration, which would in effect equate to a temporary nationalisation.
The standoff has meant that even people close to the investment process have little idea of whether the government will take control or not. The government has engaged the advisory firm FTI Consulting to look at the options, including special administration.
The government is also planning to abolish Ofwat, which could complicate matters further, while rival water companies might also consider legal action if Thames is granted a favourable deal not available to them.
Ofwat had previously told Thames that all penalties for environmental breaches and dividend payments had to be “paid by the company and its investors, and not by customers”.
While the fundraising is ongoing, the regulator has approved Thames’s request for a payment plan, which will result in it paying £24.5m, or 20% of the penalties, by the end of September, with the rest to be paid later.
The company will pay the remainder on the earliest of three possible dates, which would be either 30 days after the implementation of a restructuring plan or, if Thames enters special administration, the balance would be due 30 days after the end of that process. The final deadline for payment of the fine will be 31 March 2030.
Lynn Parker, senior director of enforcement at Ofwat, said: “This payment plan continues to hold Thames Water to account for their failures but also recognises the ongoing equity raise and recapitalisation process.”
Thames said it “continues to work closely with stakeholders to secure a market-led recapitalisation which delivers for customers and the environment as soon as practicable”.
The company said the penalties “will not be funded by customer bills”.
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