Thames Water's crumbling assets are a sign of the challenges ahead as it fights to survive

The sheer volume of waste entering Thames Water’s Mogden Sewage Works in southwest London, overwhelms the 90-year old concrete tanks. This forces the utility to pump excrement directly into the River Thames 15 times per year.

The plant, hidden by trees, is a symbol of the crisis in Thames, which provides water and sewage to 16 million people in southern England. The company, which was privatised in 1989 and is now heavily indebted, struggles to survive let alone deal with the crumbling infrastructure in its care.

The U.S. Private Equity firm KKR walked away this month from a plan of injecting 4 billion pounds ($5.4billion) of equity. This leaves Thames' fate in senior creditors who are now negotiating a deal to rescue the water regulator Ofwat.

The group, which includes investment-grade banks and hedge funds, has offered to write off 20% of their debt in exchange for a new environmental and investment regime.

If there is no deal, the British Government - which already struggles with limited public finances – may be forced to take over a company that polluted waterways and paid dividends and bonuses for its former owners and managers.

Investors are unnerved by the prospect of a collapse. This could increase borrowing costs for upgrading UK infrastructure such as electricity grids, transport systems and other UK infrastructure.

The rescue plan would have its own financial and political costs.

Creditors believe that turning around the company will require some leniency in the fines and penalties of 1.4 billion pounds Thames Water expects to receive from the regulator Ofwat, and the Environment Agency during this five-year period.

A senior creditor in the plan said that "time is running out" and added that Ofwat had listened to their proposal now after months without engagement.

We're just asking for a small amount of movement, and we are there.

The creditor who spoke anonymously because the talks were private is one of over 100 creditors who hold debts totaling more than 17 billion pounds ($17.7billion) and are willing to invest in places like Mogden.

Dave Chowings of Mogden Plant Manager, described the magnitude of the challenge during a recent site visit. He pointed to storm tanks that were the size of Olympic-sized swimming pools and said, "All this concrete is 90 years older." It's time to rebuild."

DOOM LOOP

KKR spent months assessing the amount of money needed to upgrade plants such as Mogden.

Martin Young, a water industry consultant, said that Ofwat was at a critical moment when it came to finding a solution. It had been criticised for not being able to prevent the scandal.

If they don't change, we run the risk being trapped in this doomsday loop. "That's a doomsday loop for Thames but you can also extend it out to the larger industry," he said.

Ofwat announced that it has begun reviewing the submissions of senior creditors, including their turnaround plan, approach to financial stability and proposals for governance.

A spokesperson stated that "our focus is to assess whether the plans are real, achievable and will bring substantial benefit for customers and the environmental,"

The government referred to an earlier statement that said Thames was stable, and it was closely monitoring the situation.

POLITICALLY TOXIC

The failures at Thames, according to critics, are the result of decades of political and regulatory failures, as successive governments have focused on reducing customer bills rather than driving investments.

It would be toxic to the political system if Thames Water were given the special treatment that the creditor group wants in terms of regulation.

Ash Smith, from the campaign group Windrush Against Sewage Pollution, said that the terms demanded by creditors proved that nationalisation was only the answer.

He said that customers had grown tired of business owners who based their model on the ability to break the law.

The senior creditors' 20% "haircut", which threatens to wipe out junior debt holders has angered them as well.

Tradeweb data shows that the Thames Water 2040 bond has been bid at 68.99p on the pound.

Thames is a big challenge for whoever takes it over.

Mogden has struggled with the population growth and weather changes associated with climate-change.

Thames spent 100 million pounds on the site over five years, and will spend the exact same amount in the next five.

Four of the storm pumps on the Titanic were manufactured in the 1930s, but it's getting harder to locate people who can maintain them.

Thames Water's Chief Executive Chris Weston wrote to a legislative committee on May 30, "Historically, the funding for our asset replacement has not been enough to offset our assets deterioration."

Customers want clean rivers but don't want to pay for mismanagement.

Laura Reineke is a 52-year-old charity worker who works for Thames Water. She said, "I think water has been cheap for far too long, but I am not willing to pay what we have already paid for." ($1 = 0.7362 pounds)

(source: Reuters)