Weekend press: Government officials fear Thames collapse could trigger wider rise in borrowing costs

Thames Water’s financial woes continued grab headlines over the weekend with reports that government officials are concerned that the company’s collapse could trigger a wider rise in the UK’s borrowing costs and that the sector regulator Ofwat is putting together the rescue plan that would see the firm split apart and sold off piecemeal to its neighbours. Meanwhile, Rolls-Royce has scaled back its plans to build two factories in the UK to manufacture its small modular reactor design following delays to a government competition.

Thames Water collapse could trigger Truss-style borrowing crisis, Whitehall officials fear

Senior Whitehall officials fear Thames Water’s financial collapse could trigger a rise in government borrowing costs not seen since the chaos of the Liz Truss mini-budget, the Guardian can reveal.

Such is their concern about the impact on wider borrowing costs for the UK, even beyond utilities and infrastructure, that they believe Thames should be renationalised before the general election.

Officials in the Treasury and the UK’s Debt Management Office fear that, unless the UK’s biggest water company is renationalised as soon as possible, “prolonged uncertainty” about its fate could “damage confidence in UK plc at a sensitive time”, with elections in the UK and the US later this year.

Earlier this month, the Guardian revealed details of government contingency plans, known as Project Timber, to renationalise Thames via a special administration. This could lead to the bulk of its £15bn of debt being moved on to the government’s balance sheet. Thames’ investors have refused to pump more money into the struggling company amid a standoff with the water regulator Ofwat.

Some lenders to its core operating company could lose up to 40% of their money under the plans, a move that officials believe marks a careful balance between managing public outrage at the water company’s many failures and the need to sustain investor confidence in the UK.

Those contingency plans also describe a risk of “contagion” from Thames’s plight that could trigger a loss of confidence that feeds through to wider state borrowing costs.

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There is increasing concern in Whitehall that the longer it takes to resolve the crisis at Thames, which has 16 million consumers, the greater the spillover effects will be. Thames has said it has enough money in its operating company to last for more than a year.

“It’s coming at a time of significant domestic and global political uncertainty,” said one official. “This is not something that benefits from being left unresolved. Investors want clarity and certainty even if there is a short-term pain.”

“There is a real risk of contagion from Thames,” said a second official.

Whitehall officials expect any restructuring that involves investors losing money in Thames’ water operating company to trigger legal action against the government and Ofwat. Still, officials view a swift renationalisation that forces lenders to bear losses as preferable to a long, drawn out debate over the fate of Thames that weighs on the UK’s needs to raise capital for infrastructure projects and for its general debt issuance.

The Guardian

Ofwat explores Thames Water break-up in ‘Project Telford’ rescue plan

The water regulator is working on rescue plans for Thames Water that could see its sprawling operations dismantled and sold off as piecemeal to rival suppliers.

Codenamed Project Telford, Ofwat has tasked a former private equity banker with overseeing its contingency plan for the utility giant, which is battling to stave off collapse under the weight of an £18bn debt pile.

One of the scenarios under consideration by the watchdog is a radical break-up of Thames, which is Britain’s biggest utility company that provides water and sewage services to 16 million households.

Adrian Williams, formerly of HSBC and Bridgepoint, has been drafted in to supervise Ofwat’s emergency backstop, which is separate from the Government’s own contingency proposal Project Timber.

His involvement has so far been kept quiet by the regulator, which recently removed his name retrospectively from the minutes of a board meeting in September where Thames Water was discussed.

In that meeting, he was described as an “interim senior consultant” on Project Telford.

Reference to Mr Williams’s role as an adviser to Ofwat was also recently deleted from a personal online profile.

Filings show that Ofwat has paid around £150,000 in consultancy fees to a company owned by Mr Williams.

Among a range of scenarios being explored by Ofwat is an even more radical break-up of Thames Water than had previously been envisaged.

A senior industry source with knowledge of the plans said Thames could end up being split up into as many as “a dozen” smaller companies. “There is no limit to the number it can be broken up into,” the person said.

This comes after The Telegraph revealed earlier this month that bosses at Thames are considering dividing the business into two separate smaller entities, one covering London and the other serving Thames Valley and Home Countries regions.

 The prospect of a broader carve-up has sparked interest from rival suppliers, who are now understood to be circling the company.

The source added that Thames could be carved up in such a way as to encourage other companies, such as Severn Trent and Wessex Water, to compete in a bidding war to maximise value.

This would require a complex separation of Thames Water’s debt pile, although policymakers are confident this hurdle could be overcome.

A break-up is seen as a favourable outcome among senior officials because it could prevent the Government from having to step in and take temporary ownership through the Special Administration regime.

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Thames is saddled with debts totalling £18bn and faces running out of money before the middle of next year.

The company’s financial problems could also worsen in the coming weeks as bosses enter fresh pay negotiations with union Unite. Tensions are already high after Thames unveiled plans to slash hundreds of jobs at the end of last year.

Separately, a consortium of creditors has called for an urgent meeting with Thames Water bosses and representatives at Rothschild following reports that they face steep losses under one financial restructuring proposal being discussed.

In a letter sent by lawyers at the American firm Akin Gump, the group of bondholders claimed to be “the largest coordinated group of operating company creditors” to have emerged. “We act for creditors holding debt…in excess of £5bn,” it said.

“It is no longer appropriate… for the only communication… to be by way of periodic investor calls or written questions submitted to the group’s investor relations employees,” the letter continued.

Ofwat and Thames Water both declined to comment.

The Telegraph

Distressed debt investors go fishing at Thames Water

Specialist US lenders famed for taking risky bets on troubled WeWork and the Hollywood studio MGM are snapping up debt in troubled Thames Water — in a bet that losses in the utility’s restructuring will be less severe than feared.

Reports last week stated that Elliott Management, famed for its activist investing, was buying up the debt, but it has since emerged that several more big names are piling in.

According to sources, they include Anchorage Capital, which made $2 billion on debt it bought in MGM when it was near bankruptcy; King Street, the debt investor in WeWork, the shared-office firm that filed for bankruptcy in November; and Sona, another US fund, which recently seized control of an Australian wine producer.

Three other funds — Sculptor, Centerbridge and Polus are also said to be taking the same gamble.

As Thames continues to grapple with £15 billion worth of debt, the price of its bonds has fallen over fears that the utility may go into administration, which could mean lenders lose money.

Last week some of the least secure Thames bonds were trading for as little as 63p on the pound. But investors with a large appetite for risk have been buying up the discounted bonds, betting that a solution will be secured that will not require large losses.

The financial software site MarketAxess estimated that nearly half a billion pounds’ worth of Thames’s debt has been changing hands every week in April, a fourfold increase since December.

The debt involved is the “ring-fenced” lending advanced to Thames Water, which is deemed more secure than that of its parent company, Kemble, which defaulted on a portion of its debts last month.

It is thought to be mainly in the “class A” category, which makes up the majority of Thames’s debt and is the most secured. In a hypothetical administration, where the company is forced to reduce its debt significantly, some analysts estimate that these bonds could take up to a 16 per cent haircut. The comparatively smaller £1.3 billion pile of “Class B” debt, which is less secured, could face up to 40 per cent losses.

All of the investment firms declined to comment, while Centerbridge did not respond.

The Times

Rolls-Royce scales back plans to build nuclear factories in UK

Rolls-Royce has scaled back plans to build two new factories for its small modular reactor (SMR) programme in the UK, following delays to a government design competition.

The FTSE 100 company had originally proposed one factory to make heavy pressure vessels for its SMRs and another to make the building blocks of the reactors.

It had drawn up a final shortlist of locations for the pressure vessels factory, including the International Advanced Manufacturing Park on the outskirts of Sunderland, Teesworks in Redcar and the Gateway industrial park in Deeside, Wales.

But on Friday Rolls confirmed it no longer intends to proceed with that plan because there is no longer time to build the factory and make the first pressure vessels for the early 2030s, when it hopes to complete its first SMRs.

It is still proceeding with work to build the second factory, however.

The company had been waiting for the outcome of an ongoing SMR design competition in the UK – first announced by the Government in 2015 – before it made a decision on the pressure vessel plant.

But that competition has been repeatedly delayed, with the arms length body Great British Nuclear only formally created last summer and winners not due to be announced until this June at the earliest.

Instead the engineering giant will now buy its heavy pressure vessels from a third party supplier.

The large, metal components sit at the heart of nuclear reactors and must be able to withstand extremely high temperatures and pressures. They are only made by a select group of companies, partly due to the need for specialist welding techniques.

Among their number is now Sheffield Forgemasters, which was nationalised by the Ministry of Defence in 2021.

Earlier this month, Sheffield became the sole UK company to gain the qualifications needed to make SMR reactor vessel components.

Despite having shelved its plans for a heavy pressure vessel factory, Rolls is still pressing ahead with plans to build its second factory, which will build the modular units that make up its SMRs.

It is understood that sites shortlisted for the pressure vessel factory will also be contenders for the second plant but no decisions have been made.

On Friday, a spokesman for Rolls-Royce SMR confirmed the company had now “prioritised work on our modules assembly and test facility”, adding: “Our efforts are focused on identifying the best site to support our deployment at pace.”

The Telegraph

Britain must spend £30bn to strip CO2 from atmosphere and hit net zero, experts warn

Britain must invest £30bn in a network of massive air cleansing systems designed to strip CO2 from the atmosphere if it is to reach net zero, a government-funded report has warned.

The “direct air carbon capture systems” would remove up to 48 million tonnes of CO2 from the air each year and then pump it into disused oil and gas reservoirs under the North Sea or Irish Sea.

Without such a scheme the UK will never reach its target of net zero emissions by 2050, according to the report by Energy Systems Catapult, a government-funded body that promotes innovation.

It also warns that direct capture will be essential if the UK is to maintain an aviation industry, because aircraft are unlikely ever to run entirely on sustainable fuels.

“Beyond 2040 we see few options to abate remaining emissions so use of direct air carbon capture and storage (DACCS) will be required,” it said.

“Direct air capture would collect 38-48 million tonnes of CO2 a year by 2050. This technology appears to be essential to meeting net zero in all our scenarios and yet remains unproven at scale.”

Direct air capture plants would need to be built along the UK’s east coast, from East Anglia to Aberdeen, so that the CO2 captured could be pumped to storage sites under the North Sea, the study said.

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The study warned that aviation would always generate greenhouse gas emissions, meaning that every plane flying into or out of the UK will undermine its net zero targets. The only solution was to deploy direct air capture to remove CO2 at the same rate as it was emitted by aircraft, it said.

“It is not possible to replace the entire fleet of fossil fuelled aircraft before 2050… direct air capture will be required to abate aviation emissions,” said the report.

The UK’s carbon footprint currently stands at about 750-800m tonnes of CO2, half of which is emitted within its borders while the rest comes from goods produced abroad and then imported.

Guy Newey, chief executive of Energy Systems Catapult, said: “We have credible pathways to net zero but we need to accelerate the pace and scale of deployment to levels not yet seen.”

The Climate Change Committee, which advises the Government, has described direct air capture as “a necessity, not an option”, for the UK to meet its net zero targets.

A Department for Energy Security and Net Zero spokesman said removing greenhouse gases from the atmosphere was essential in helping the UK achieve energy security and independence.

The spokesman added: “The UK has one of the greatest CO2 storage potentials of any country in the world, with the North Sea having the potential to hold an estimated 78 billion tonnes. We are tapping into this potential by investing £20bn in carbon capture and storage, driving economic growth and supporting up to 50,000 jobs.

“We are also investing up to £100m in research and innovation for greenhouse gas removal technologies such as Direct Air Capture.”

The Telegraph

Thames Water customers will have paid £540mn for London’s ‘Super Sewer’

Thames Water’s customers will have paid more than half a billion pounds in addition to their water bills once a new 25km sewage tunnel under London’s river Thames is operational next year, a project they will have to keep funding throughout its projected 125-year lifespan.

London’s so-called “Super Sewer” is funded by a surcharge on Thames Water customer bills, currently £26 a year per household. The utility’s 16mn customers have paid £430mn over the eight years since construction started and will have paid £540mn by March 2025 when the tunnel is expected to be operational, according to a study of the project’s accounts.

The study comes as testing on the £4.5bn tunnel — a cost that compares with the £3.5bn forecast a decade ago — is expected to start next week, with the removal of the deep underground walls that have kept it separate from the existing system while the new concrete caverns were being built.

The project, which trades as Tideway, will be the biggest improvement to the capital’s sewerage network in 150 years. It will divert most of the effluent from 34 combined sewage overflow pipes in the central section of the river to a treatment plant in south-east London.

Scrutiny of Tideway’s funding model — which serves as a blueprint for other large infrastructure projects in the UK such as the new Sizewell C nuclear plant — comes amid wider concern about a financial crisis engulfing Thames Water, the UK’s biggest water provider.

Thames Water’s parent company told bondholders earlier this month that it was in default, heightening fears that it could be renationalised. The utility wants to hike customer bills by as much as 56 per cent by 2030, making any surcharge to pay for Tideway even more controversial.

Water companies argue that higher bills are necessary to invest in new infrastructure and combat pollution, an issue that has become a lightning rod for popular anger.

David Hall, visiting professor at Greenwich University who calculated the £540mn figure, said the project “makes consumers pay three times over”.

“First they are paying almost £0.5bn up front, more than all the equity invested by Thames Tideway’s shareholders, then they are paying for the returns of shareholder loans, and then from continuing debt.”

Thames Water does not own Tideway. When the 7.2 metre-diameter tunnel was being planned — in response to a 2010 EU directive to reduce sewage outflows — Thames Water refused to inject new equity into the project. The water company’s shareholders at the time, which included Australian asset manager Macquarie, argued that its debts were too large and the risks of tunnelling near key landmarks such as the Houses of Parliament too great.

Instead, the UK government and Thames Water agreed to set up an entirely new company that would be privately financed and regulated by Ofwat. It was named Bazalgette, after the engineer who designed London’s sewage system 125 years ago. That company now trades as Tideway.

Tideway said its funding model “has proved effective, with private sector investment upfront and costs spread over many millions of households”.

To lure long-term institutional investors, the government acted as a backstop on some of the financial risks including cost overruns. However these “have not been called on and are not expected to be called on as the project reaches completion”, said Tideway.

Macquarie said: “When we first invested in Thames Water, London relied on a sewer system built 150 years ago. Recognising a desire for change, we commissioned Thames Tideway which sought the best market terms to deliver value for customers and a generational investment to meet the needs of the capital’s growing population.”

Thames Water paid around £1.1bn towards the cost of the tunnel for enabling works, while Tideway’s investors — which include Allianz, Dalmore Capital, Amber Infrastructure, and DIF, which sold its stake in 2022 — invested £509.7mn in equity and loaned the company £764.5mn when it was set up in 2015.

Since then the shareholders’ loans have increased to £836mn, for which those investors agreed a rate of 8 per cent in interest until they mature in 2064, according to the accounts.

Overall, the shareholders have received £298.1mn over the past eight years: £243.6mn of interest and £54.5mn of capital repayments up to March 2023 in lieu of dividends, according to Tideway.

The rest of Tideway’s £4.2bn debt is held with commercial banks or via other intergroup loans.

The Financial Times

Plans for huge solar farm described as frightening

Lightsource bp wants to build the solar panels across three sites in northern Anglesey, producing enough energy to power more than 130,000 homes.

With a capacity of 350MW and covering more than 3,000 acres, the Maen Hir development would be almost five times that of the biggest active solar farm in the UK.

According to developers, the solar and energy storage project – which will need UK government consent due to its scale – would go some way towards reaching the net zero targets, external.

They also state that they plan to invest in skills, education and jobs on the island.

But the plans have already attracted opposition from some who question the scale of the development, with additional concerns over the loss of so much high quality agricultural land.

The Maen Hir plans spread across three separate sites – Rhosgoch, land to the south of Llannerch-y-Medd and the northern bank of Llyn Alaw reservoir.

But this is by no means the first solar development on Anglesey.

Recently a 49.9MW development, over 190 acres, was built near Rhosgoch.

Also last year, a 35MW development was granted planning consent, covering around 150 acres of land near the villages of Bryngwran and Caergeiliog.

But as the proposed solar farm is so large, with the expectation that it will produce more than 350MW, it is considered a Nationally Significant Infrastructure Project (NSIP).

This means that UK government ministers, rather than Anglesey council or the Welsh government, will make the final decision based on the recommendation of the Planning Inspectorate.

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At present the largest development of its kind in the UK is the Llanwern Solar Farm, Newport, which has a capacity of 75MW.

The Maen Hir project would be almost five times bigger, but a development of a similar size is already being built between Faversham and Whitstable in Kent at a cost of around £450m.

A spokesperson for Lightsource bp said it “respected local concerns”, but that this was “only the start of the process”.

It is expected that the land will remain available for grazing even after any panels are installed, with additional screening measures to mitigate the visual effects.

“Currently, our proposals for Prosiect Maen Hir are in the preliminary stages,” they said.

“Work is being undertaken to identify the most appropriate areas of the land available to us for development in advance of consultation taking place later this year.”

The spokesperson said the company wanted local people to inform and influence the development, and urged them to take part in the consultation.

Despite being early in the planning process the plans have already been discussed by some of the area’s community councils.

Among them is Amlwch Town Council, whose members have already submitted a letter stating their strong opposition.

Chairman Gareth Winston Roberts said there were “very strong feelings” and that other solar schemes had not created permanent jobs, which he said were badly needed in the area.

Neither Anglesey nor other local councils have the right to make a decision at the end of the day, nor do Cardiff, and I think that is unfair on us in Wales,” he said.

“What effect is it going to have on nearby people?

“It’s so big, I think it would be the biggest in the UK, and that’s scary.”

An Anglesey council spokesman said the authority would state its position on any proposed development as part of the planning process.

But a final decision is not expected for possibly years, with UK government ministers set to make the final judgment based on Planning Inspectorate recommendations.

BBC News

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.