Thames Water CEO Steers Away From Break Up After Covalis Bid

(Bloomberg) -- The chief executive of Thames Water warned breaking up the utility would be a distraction from dealing with its bigger problems of fixing chronic leaks and sewage spills.

The heavily-indebted utility last week received a bid from Covalis Capital that hinges on a plan to raise money by selling off some Thames assets before floating the remaining company on the stock market.

Breaking up the company was one rescue option outlined by regulator Ofwat in July as a way to avoid Thames being temporarily nationalized.

Thames is in crisis and is battling to avoid being plunged into special administration. The company urgently needs to find equity after its shareholders refused to invest more money in March, declaring the company “uninvestible.” Next week, Ofwat will publish its final determinations on new regulation setting out returns for investors. Thames is banking on this being enough to attract new money.

Chief executive Chris Weston said breaking up Thames wasn’t his preferred option, though he conceded a final decision would be down to the new owner. 

“My concern in looking at a break up would be that it would distract management from sorting out the fundamentals of the company. So it’s not something that is on our list at the moment to consider,” he told journalists on a call Tuesday.

Thames saw a 40% increase in pollution incidents in the first half of the year, reporting 359 so-called category one to three pollution incidents. It blamed an especially wet spring and summer.

Debt Pile

Thames said its debt pile grew to £15.8 billion ($20.2 billion) in the six months to October, as it warned it may not be able to continue operating without a cash injection.

The UK’s largest water and sewerage supplier said net debt increased from £14.7 billion at the end of March. The company’s gearing — the level of debt compared to equity — rose to 84.2% from 80.6% at the end of March, according to a statement on Tuesday.

Weston said the equity raise is progressing and there has been “considerable interest” from investors. Indicative bids were due last Thursday with interest from Castle Water Ltd. as well as Covalis. Castle wants to eventually list Thames on the stock exchange - a move Weston didn’t comment on.

Weston said he was “comfortable” with the number of bids they had last week, adding that they were “credible parties” whom the company would continue to work with as Ofwat confirms its final decisions next week.

Final Determinations

The utility wants Ofwat to allow equity investors to receive a return of 5.7% for the next five years — much higher than the 4.8% Ofwat proposed in a draft ruling in July. A final decision is expected on Dec. 19, and Thames may appeal to the Competition and Markets Authority if it’s unhappy with the outcome.

On Tuesday Thames warned “material uncertainty” exists “which may cast significant doubt on the Group and Company’s ability to continue as a going concern” as it doesn’t “have sufficient committed liquidity to meet their liabilities as they fall due” over the next 12 months.

For now, Thames is still clinging on and currently has enough cash to last until March, after creditors agreed to release £0.5 billion in reserves.

The company is awaiting a court hearing next week to get approval for a £3 billion emergency loan from creditors. That would give it enough cash to last until October.

Despite the turmoil, the company paid out £1.85 million in bonuses to executives compared to £888,000 for the same period last year.

Weston was criticized for taking a £195,000 bonus for the first three months of the year, and Ofwat last month blocked Thames from clawing back that money from customers.

Weston said good pay packets were key to attracting talented people who could help sort out Thames’s financial mess.

“We operate in a competitive market and if we don’t offer competitive packages, people will not come at Thames and that will not help us solve the problem,” he said.

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