Showing posts sorted by relevance for query THAMES WATER. Sort by date Show all posts
Showing posts sorted by relevance for query THAMES WATER. Sort by date Show all posts

Friday, July 01, 2022

CPP IS A SHAREHOLDER

Thames Water shareholders to inject £1.5bn as part of business overhaul

Thames Water shareholders will inject as much as £1.5bn into the company as the UK’s biggest water utility seeks to accelerate a shake-up of its business amid regulatory scrutiny over its treatment of sewage.

Investors will provide an initial £500mn of new equity during this financial year, the group said, which serves almost a quarter of the UK population with water and wastewater services. Thames Water is working with investors on plans to provide a further £1bn of equity.

“[The funding] will be subject to certain conditions, to drive Thames Water’s turnaround over the remainder of the current regulatory period, and establish a solid foundation for Thames Water’s long-term growth,” the water utility said on Thursday.

Ofwat, the industry watchdog, raised “serious concerns” in March over the sector’s treatment of sewage. The regulator said it is pursuing “enforcement action” against Thames Water and four other groups.

“We have made good progress in fixing the basics and tackling the structural challenges in our business as well as laying the foundations for our long-term recovery,” said chief executive Sarah Bentley.

Thames Water has approved an £11.5bn business plan for the period ending March 31 2025, which aims to improve outcomes for customers, and tackle leakage and river health.

The latest plan includes a £2bn increase in expenditure from the £9.6bn that was previously allocated. Thames Water launched an overhaul of its business in March 2021.

A detailed three-year analysis that came to light in October showed Thames Water illegally discharged the equivalent of two years’ worth of untreated sewage into rivers.


Thames Water/utilities:

investors tapped for cash after

deluge of complaints

Removing the dead hand of the Treasury was meant to boost investment in the water companies privatised in 1989. But after an initial surge, investment slumped as owners engineered lavish returns. That sowed the seeds of operational and financial problems in parts of the sector. As anger mounts over sewage discharges into rivers, investors are now being asked to shore up strained balance sheets.

On Thursday, the UK’s biggest water company Thames Water announced it was raising as much as £1.5bn in extra capital from investors, including the UK’s biggest private pension fund USS. Painful but at least all investors participated. When Southern Water received a £1bn emergency equity injection from the Australian infrastructure manager Macquarie last year, existing investors were heavily diluted.

Thames Water is also being pursued by the regulator over its treatment of sewage, after repeated illegal discharges. It is not alone. A majority of wastewater companies in England and Wales now face enforcement action. This week regulator Ofwat added Pennon-owned South West Water to the list.

The frequency of illegal spills might suggest water companies view penalties as simply the cost of doing business. But investors do take the issue seriously. After Ofwat’s move on Pennon was announced, £185mn was wiped from its market value. That is more than six times the maximum fine, which is 10 per cent of relevant revenues.

Significant investment — between £23bn and £80bn — might be needed to cut down on river pollution, says Jefferies. Passed on to customers, that would put bills up between 16 per cent and a third. That would be unacceptable given the cost of living crisis. Companies might have to take some of the strain.

Water investors will get the first inkling of their post-2024 returns after Ofwat publishes its draft methodology next month. JPMorgan expects the allowed cost of equity to be 20-40 basis points lower than the 2019 review. Every 25 basis points of allowed cost of equity is worth 2-3 per cent of earnings per share for quoted companies United Utilities, Severn Trent and Pennon.

Investing in monopolies with inflation-linked revenues has obvious appeal. But mounting public anger over pollution will force the slowpokes to clean up their act. Shareholders should be braced for higher investment and lower returns.

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Monday, March 18, 2024

THATCHER'S PRIVATIZATION 
Put Thames Water into special administration, Lib Dems tell ministers

CANADIAN PENSION; OMERS IS ONE OF THE LARGEST INVESTORS


Sandra Laville and Alex Lawson
Fri, 15 March 2024 

Thames Water this week declined to commit extra funds to a £180m industry-wide initiative to fast-track efforts to reduce sewage pollution.Photograph: Toby Melville/Reuters

Thames Water should be put into special administration by the government and reformed as a public benefit company, the Liberal Democrats have said.

Sarah Olney, the Lib Dems’ Treasury spokesperson, has called in a parliamentary debate for the biggest privatised English water company to be wound up under legislation that has recently been updated by ministers.

It makes the Lib Dems the first mainstream political party to say the struggling company must be taken over to secure water and sewerage services for 15 million people.

Thames Water is seeking a shareholder bailout of £2.5bn to the end of the decade to stay solvent, but it wants Ofwat, the water regulator, to allow it to increase customer bills by 40%, pay higher dividends and face lower fines for pollution in order to secure the shareholder investment.


Olney said in parliament: “Thames Water is no longer a functioning company and the government has a choice: either bail them out with taxpayer money or listen to our calls to put them into special administration to then be reformed into a company for the public benefit.”

Thames Water declined to commit extra funds this week to a £180m industry-wide initiative to fast-track efforts to reduce sewage pollution in England’s waterways. Its parent company has been told by its auditors that it could run out of money by April if shareholders do not inject more cash into the company. It needs to repay a £190m loan due in April.

Special administration can be triggered if a company cannot pay its debts or is not performing its statutory requirements.

“The final straw was this week, when Thames Water bosses refused to stump up the cash for new sewage investments,” said Olney. “It was shocking that Conservative ministers just let them get away with it.”

The government is drawing up an emergency plan, known as Project Timber, in the event of the collapse of Thames Water. But Olney said ministers must use their recently updated water insolvency legislation to put the company into special administration.

This can be triggered by the secretary of state or Ofwat. Olney said with the company unable to pay its debts, and recusing itself from new sewage investments, the threshold for special administration had been met.

Under the updated water insolvency legislation the company can be taken over as a going concern to make sure that water and wastewater services continue for 15 million people. The taxpayer would not be liable for the debts, which would stay with the holding company, according to independent analysis of the updated legislation by the House of Commons library.

Olney said the company, once in special administration, could be reformed as a public benefit company, where “profit is no longer put above environmental goals”.

Olney asked the government to provide details of Project Timber. In response, Mark Spencer refused to comment specifically on Thames Water, citing “market sensitivities around private companies”. The environment minister said “the government does have a plan” to support companies in essential services such as utilities or banking “in moments of distress”.

He said: “The government’s priority is the ongoing provision of water and wastewater services.”

Thames Water admits in its latest business plan, which has been submitted to Ofwat for approval, that it has overseen the “sweating of assets” and allowed its infrastructure to decline over decades because it has stretched the life of the assets, repairing rather than replacing.

It is promising to invest £4.7bn to tackle the decline of its infrastructure but says to fully repair its sewers would cost £1.5bn and its sewage works £2.2bn. Thames says it will not be able to deliver the full extent of the investment into its ageing assets nor meet the environmental obligations it had wanted to meet by the end of the decade.

The company is also under investigation by Ofwat and the Environment Agency for suspected illegal sewage discharges from many of its treatment works. The Ofwat investigation, which is due to report within months, could impose multimillion-pound fines on Thames. The company admits that 157 treatment works are non-compliant.

Thames Water declined to comment.

A government spokesperson said: “Water companies are commercial entities and we do not comment on the financial situation of specific companies as it would not be appropriate. We prepare for a range of scenarios across our regulated industries – including water – as any responsible government would.”

Thursday, July 11, 2024

Debt, sewage and dividends: the rising tide of Thames Water’s troubles

Anna Isaac and Alex Lawson
THE GUARDIAN
Wed, 10 July 2024 

Thames’s financial and environmental problems have made it a focus for rising criticism of the privatised water industry.Composite: Guardian Design/Getty Images/Rex/Shutterstock

Government officials who tour Coppermills, a vast Thames Water treatment works in north-east London, are left under no illusions about the dire condition of Britain’s infrastructure.

“It’s in a shocking state,” said one official who has visited the 1960s site, which supplies approximately a third of the capital’s population with drinking water and sewage services. “It’s a slow-motion management disaster.”

Thames has publicly admitted that Coppermills is in such poor condition that it could be a “point of failure”, leading to prolonged water supply disruption for more than 500,000 people.

Coppermills is just one corner of a huge, decaying empire that serves 16 million customers across London and the Thames Valley.

Evidence of that decay has become all too frequent: from the rivers clouded with sewage when it rains, and the burst pipes and water mains, to the threatened water shortages when the sun shines. A slow-moving crisis that has engulfed Thames has left it teetering on the brink of a painful restructuring, or even a temporary renationalisation.

Thames has also become a powerful totem of mismanagement, corporate greed and lax regulatory oversight. And for a new Labour government coming to terms with its economic inheritance, Thames is a timebomb that is about to detonate.

New breed of investors


The roots of that decay can be traced back more than two decades. In the early 2000s, as the government prepared to shunt two renationalised companies, Railtrack and British Energy, back into private hands, the message to regulators was clear: play nice and do not put off foreign investors.

It was against this backdrop of light-touch regulation that Macquarie, which started out as a small Australian merchant bank in the 1960s, decided to buy Thames Water in 2006.

Britain’s privatisation wave, kicked off by Margaret Thatcher in the 1980s, was entering a new phase. The early owners were cashing in their lucrative investments, and a new breed of financially savvy investors was circling.

The Macquarie-led consortium outmuscled investment heavyweights – including the gas-rich state of Qatar and Guy Hands’s Terra Firma – to land the £8bn acquisition from German’s RWE.

Macquarie pruned costs ruthlessly. Thames Water lifer Cliff Roney, who had a four-decade career within the company before retiring in 2018, recalls a perceptible shift when it took over from RWE.

“When Macquarie arrived, they presented a glossy presentation to us, promising investment in assets and staff. Within months, it was clear we’d been sold a pup,” he says. “Some important sites needed in case of water shortages were sold off. They were so tight on spending, you could barely order a box of pens. All the skills were contracted out – we had electricians, blacksmiths, window fitters – they were all outsourced under Macquarie.”

Parsimony even extended to the boardroom – although not where pay was concerned. When Martin Baggs left his job running Thames Water in late 2016, he might have expected a lavish celebration, or at least a gold watch. Baggs had spent seven years as chief executive churning out profits and dividends for Macquarie. But in recognition of his service, Baggs and his top team were each presented with a tea towel.

“It had self-portraits drawn by the directors – they didn’t even pay for a designer to create them,” says a former Thames executive. “Macquarie ran a very tight ship: if money didn’t need to be spent, it wasn’t.”

They added: “I’m not saying they’re not the bad guys in this, but they were responsible in the core running of the company. If you needed to buy vital chemicals, you could buy them – you just couldn’t buy any more than was absolutely necessary. It was all very precise. They would not leave any dividends if that could be taken out.”

Hollowed outInteractive


But money was flowing, elsewhere. A £656m dividend was extracted in the first year of Macquarie’s stewardship, in 2007, dwarfing the company’s profits of £241m. Thames churned out dividends of more than £200m in each of the seven years which followed.

It carved Thames up into a complex corporate structure, layering debt across multiple tiers of companies. This so-called whole-business securitisation even involved setting up subsidiaries in the Cayman Islands.

The consortium would ultimately take out £2.8bn during Macquarie’s ownership, representing two-fifths of the total £7bn in dividends that Thames Water has paid between 1990 and 2022, according to Guardian analysis. Macquarie said £1.1bn was paid out to all shareholders, with its funds receiving £508m.

Its current owners – which include Canadian pension fund Omers, the UK universities pension fund and a subsidiary of the Abu Dhabi sovereign wealth fund – have not taken a dividend since 2017, although “internal” dividends have been paid to service debts higher up its complex corporate structure.

Thames Water, which was privatised with zero debt, saw its debts swell from £3.4bn in 2006 to £10.8bn in 2017, when Macquarie sold its final stake. The pension position went from a £26.1m surplus in 2008 to a £260m deficit in 2015. “They left Thames in a crumbling state,” says Roney.

From 2004 to 2019, there were “grotesque excesses” of debt amassed at water companies, including Thames, while dividends grew fatter, a senior water industry source said. “It was asset stripping, pure and simple.”

A Macquarie spokesperson said: “Debt increased in line with the company’s asset base, which doubled due to the record £11bn of investment delivered over the period.”

The highest profile Macquarie executive linked to Thames is Martin Stanley, its former head of asset management, whose division oversaw Thames Water transactions. He earned £10m in 2021, the year he stepped down from the role.Interactive

Irked by “misconceptions” about utility investors, another Macquarie executive, Martin Bradley, the head of asset management, who oversaw the Thames transactions, wrote to the Financial Times earlier this year arguing that the consortium had kept bills affordable and invested £11bn in network upgrades.

The company has even taken the unusual step of addressing media “mischaracterisations” online.

The Macquarie spokesperson said: “We have had no influence over the decisions taken at Thames Water in the seven years since our managed funds sold their final equity stake. During the 11 years in which our funds were shareholders in Thames Water, we oversaw the largest investment programme in the company’s history and the highest rate of investment per customer in the industry.”

Concerns about underinvestment in the water industry amid the broader challenges of the climate crisis and population growth led to a National Infrastructure Commission report in 2018 which underlined the need for greater drought resilience and leakage reduction. It is still issuing such warnings, saying in 2023 that “a lot more still needs to be done”.

In the aftermath of that report, long-mooted plans for reservoirs finally advanced, including a reservoir to the south-west of Abingdon in Oxfordshire – although it still remains the centre of an intense local tussle.

By the time Macquarie cashed in its stake, work had begun on the much-debated Thames supersewer, a separate project that sits outside Thames Water’s ownership but which will ultimately be paid for by Thames customers.

It was hard to find a corner of British infrastructure free from the bank’s reach. From airports such as Glasgow, Aberdeen and Southampton to the gas pipe network manager Cadent, Macquarie was now deeply embedded in the UK’s critical national infrastructure.

Its link to Cadent would prove handy – insiders say Sir Adrian Montague’s position as Cadent’s chair, and experience dealing with Macquarie, contributed to his appointment as chair of Thames in July last year, parachuted in to handle its turnaround.

But along with those assets, Macquarie has acquired a mixed reputation among financial services professionals. Three current lenders to Thames criticised its approach during its time as a major shareholder at the company, saying its behaviour had reflected poorly on the rest of the investment community.

Outrage grows

In March 2017, Britain’s biggest water company was hit with a huge fine – a precursor of what was to follow.

It was just eight days after Macquarie had sold its final stake in Thames to investment managers controlled by Omers and the Kuwait Investment Authority.

The Environment Agency’s prosecution led to a record £20.3m penalty, imposed after the emergence of huge leaks of untreated sewage into the Thames and its tributaries which had led to serious impacts on residents, farmers and wildlife, killing birds and fish. The incidents, in 2013 and 2014, took place at sewage treatment works at Aylesbury, Didcot, Henley and Little Marlow, and a large sewage pumping station at Littlemore.

“This is a shocking and disgraceful state of affairs,” said Judge Francis Sheridan, delivering the sentence at Aylesbury crown court. “One has to get the message across to the shareholders that the environment is to be treasured and protected, and not poisoned.”

In the four years after Macquarie’s exit, Thames was fined £32.4m for 11 water pollution cases, including £4m for discharging an estimated half a million litres of raw sewage into the Seacourt and Hinksey streams in Oxford.

In 2023, it was fined £3.3m and called “reckless” over a 2017 incident which saw millions of litres of raw sewage enter two rivers near Gatwick airport. That came on top of £12m of penalties for late or badly managed roadworks in London.

The fines were also racking up elsewhere: in 2021, Southern Water was fined a new record of £90m by the Environment Agency for deliberately dumping billions of litres of raw sewage into the seas off north Kent and Hampshire over several years.

Between 2015 and the summer of 2023, there were 59 prosecutions of water companies in England, with fines handed down by the courts of over £150m. As the fines mounted, so did the public outrage, led by a clutch of vociferous campaigners, notably the former lead singer of the Undertones, Feargal Sharkey.

Financial implosion


The political winds started to shift, with the then environment secretary, Michael Gove, saying in 2018 that water companies “have not been acting sufficiently in the public interest.” Some had been “playing the system for the benefit of wealthy managers and owners, at the expense of consumers and the environment”, hiding “behind complex financial structures” to avoid scrutiny, he said. Ultimately, it had allowed “failures to persist for far too long”.

But the wheels of regulation turn slowly. Ofwat’s concerns were building in 2018, 2019 and 2020, according to insiders who were working on issues such as dividends at the time. In 2017, the Cayman subsidiaries were ordered to be shut down.

“By the time Macquarie left, it was abundantly clear that it had ransacked Thames,” a former Ofwat board member told the Guardian. “It might have been after that particular horse had bolted, but Ofwat did take steps to try and stem the tide of dividends.”

But it was ultimately only last year that Ofwat gained new powers to stop the payment of dividends to shareholders if they threatened a water company’s financial resilience.

Related: Thames Water to shut Cayman Islands subsidiaries under new chairman

And despite the catastrophic financial position it left Thames Water in, Macquarie made a shock return to the English water industry in 2021, taking control of troubled Southern Water and injecting £1bn to save it from possible renationalisation. Its surprise comeback came with a warning from the then chair of Ofwat, Jonson Cox, who told Macquarie that “very profound changes” would be required at Southern.

Macquarie said that the regulator had welcomed its investment in struggling Southern Water.

Ofwat faced a worsening conundrum. The water monopolies were so heavily indebted that fines risked further undermining their financial resilience.

By 2021, mounting outrage over sewage discharges had reached a climax. In November of that year the Environment Agency and Ofwat announced separate, parallel investigations into “potential widespread non-compliance at wastewater treatment works”.

Meanwhile, financial problems at Thames were starting to mount. Sarah Bentley, the latest chief executive to promise to turn around the struggling utility, abruptly resigned in June 2023. Before the week was out, it emerged that the government had begun contingency planning for the collapse of Thames, and that Montague would become chair.

Accounts differ on the reasons for Bentley’s departure. Industry sources claim she was frustrated with a lack of available funds to turn around Thames more quickly. Montague told MPs she was “feeling the burdens of office were quite considerable”, before hastily apologising. “Sarah Bentley became known as the Scarlet Pimpernel: she was barely seen and only communicated with most staff through emails and bulletins,” recalls Roney.

Across English and Welsh water companies, fraught negotiations with Ofwat were under way over how much they could increase bills by for their next five-year spending cycle, due to run from 2025 to 2030.

But cash was running out. In July 2023, Thames said it had secured £750m of emergency funding from its shareholders to run to March 2025 and indicated that a further £2.5bn would be needed to cover the five years to 2030.

By December, Thames’s complex financial structure was the source of intense examination in Westminster, and had been described by one MP as an “absolute shambles”.Interactive

The arrival in January of Chris Weston, the former British Gas executive who was most recently boss of power generator Aggreko, was a last roll of the dice by its despairing shareholders. The £2.3m-a-year chief executive was “the bolshiest utilities executive they could find,” sources said.

But not everyone is convinced of this: another former colleague says Weston had a reputation for indecision at Centrica, notably when he was running its North American subsidiary Direct Energy. “The joke was Chris was much like the Canadian weather – if you didn’t like his decision, just hang around for half an hour and it will change,” a source recalled.

In March, shareholders dropped a bombshell: they pulled the plug on the first £500m tranche of the £750m committed the prior summer, deeming the company “uninvestable”. Ministers showed little sympathy – Gove called Thames “arrogant”. With no more shareholder cash forthcoming amid the standoff with Ofwat, Thames’s parent company, Kemble, told its creditors in April it would be unable to pay a £190m loan due at the end of that month.

Inside Whitehall, contingency planning for Thames’s failure gathered pace. A team set up inside government to study the Thames situation in 2023, codenamed Project Timber, drafted a blueprint for turning Thames into a publicly owned arm’s-length body. Lenders would be forced to take heavy losses – with the rest of its £15.6bn of debt added to the public purse. Its dire situation was described as a “critical risk” to the country in briefings to the prime minister, Keir Starmer, and chancellor, Rachel Reeves, within days of them taking office.

Related: Thames Water nationalisation plan could move bulk of £15bn debt to state

A Thames Water spokesperson said: “We have set out an ambitious business plan for the next five years, and with consistent leadership and priorities, time and resources, and the appropriate regulatory determination, we will turn around this business and make it perform for all our customers, the environment and our wider stakeholders.”

The special administration regime for water monopolies, hastily drawn up when the industry was privatised in 1989, was updated. The changes now allow companies to enter administration and ultimately be sold as a going concern after their debts are restructured, rather than liquidating the company.

Crucially, the rules have been rewritten to protect taxpayers, ensuring any state support issued would now need to be repaid, before even secured creditors.

The company’s fate now rests on how generous Ofwat is with its first ruling on its spending plans on Thursday. Thames has been lobbying desperately to allow it to pay dividends up to Kemble, increase bills by up to 59% and receive smaller fines, but it is unlikely to receive a warm reception.

A damaging restructuring for investors and lenders – or even temporary renationalisation – looks inevitable. Ofwat’s final view on bills increases will be released in December. Thames, its investors and – quietly – Macquarie will hope it is still in private hands by that point. The 35-year privatisation experiment looks set to culminate in a crisis that the new Labour government will have to clear up.

Saturday, October 26, 2024

PRIVATIZED WATER

Thames Water secures $3.9B loan to keep it afloat through October 2025



Thames Water, Britain's largest water utility, announced Friday it had secured a $3.9 billion lifeline, access to cash reserves and extensions on its liabilities to keep it afloat for the next 12 months as it battles to restructure a $20.8 billion mountain of debt. File photo by Terry Schmitt/UPI | License Photo

Oct. 25 (UPI) -- Britain's embattled Thames Water, the country's largest water utility, announced Friday it had secured a $3.9 billion line of credit, access to cash reserves and extensions on its debt to keep it afloat through October 2025 after regulators capped bill rises.

The company, which serves 16 million homes and businesses in London and the southeast, said in a news release that it had launched a "consent process" on a transaction support agreement with its creditors and shareholders that if approved would provide a significant boost to Thames Water's "liquidity runway."

It said completion of the Liquidity Extension Transaction and the related Security Trust and Intercreditor Deed proposals would improve the solvency position of the business sufficiently "to enable us to continue with the planned investment and maintenance of our infrastructure in order to continue to meet customers' needs, and our environmental responsibilities."

The deal buys Thames more time to restructure a $20.8 billion debt mountain that it admitted would climb to $23.3 billion by the end of the financial year in March.

Related
British water companies ordered to repay $139M to customers for poor performance
Britain's Thames Water secures $960M cash injection amid nationalization threat
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British water utilities seek approval for $117B modernization plan paid for by higher bills
British water companies ordered to repay $139M to customers for poor performance

But Thames said it would also allow it to progress its equity raise process, a recapitalization transaction and complete a final determination process to figure out if a five-year Ofwat package of price controls, service requirements and incentives is workable -- and if not, to appeal to the antitrust regulator.

Launching an appeal with the Competition and Markets Authority would further extend the transaction, keeping Thames liquid for another seven months through May 2026.

The BBC reported that the deal centered on existing creditors agreeing to take a haircut.

Last month, Thames warned it could run out of money by December after Ofwat, the water industry regulator, placed it in special measures and denied it permission in July to hike customers' bills -- initially by 43% by 2030 and then 53% -- that the company said it needed to avoid going bust

Thames and 15 other water utilities in England and Wales wanted to cover the $135.7 billion cost of modernization plans to maintain quality drinking water, build 10 new reservoirs and cut water pollution by raising annual bills by $187 over the next five years.

But Ofwat capped the rise at $122 amid public anger over poor performance including the loss of billions of gallons of water through leaks, raw sewage spills into rivers and lakes and polluted swimming beaches.

Thames was allowed a 23% raise meaning the average bill will rise to $695 a year.

The cap is linked to a September 2023 ruling in which Ofwat said 11 of the water companies must pay their customers back a combined $139 million in 2024 through lower bills as a penalty for "underperformance" on pollution, leaks and customer service.

As the largest water utility by far, Thames had to pick up 90% of the tab or $122.7 million after their performance was assessed against annual targets for 2022 to 2023 and found "seriously wanting." It was among seven water companies judged as "lagging, with the other four deemed only "average" and none were categorized as 'leading.'"

However, CEO Chris Weston hailed Friday's announcement as proof of the progress Thames, which has a $20.8 billion debt mountain, was making toward getting back onto a more stable financial footing, stressing that the company had also upped Ofwat-verified service performance levels

"We are working closely with and have the support of our creditors, enabling Thames to continue to implement our turnaround plan so that we can deliver better results for our customers and the environment whilst seeking to attract new capital into the business," said CEO Chris Weston.

"In the meantime, our teams on the ground continue to supply our services to our 16 million customers every day."

Thames Water Chairman Sir Adrian Montague said the finance injection was an important step in the process of bolstering the company's long-term financial resilience.

"There will be further stages and we will continue to work collaboratively with our many stakeholders as we look to attract new equity into the business and seek a final determination that enables the delivery of our ambitious business plan for the next five years," said Sir Adrian.

Tuesday, April 16, 2024

Australia’s Macquarie among lenders to Thames Water’s parent company


Julia Kollewe
THE GUARDIAN
9 April 2024·

Thames Water’s shareholders refused to stump up £500m as promised at the end of March.
Photograph: Toby Melville/Reuters

The Australian investment bank Macquarie, which has been criticised for its role in the privatisation of England’s water industry, is understood be among lenders to Thames Water’s troubled parent company.

The former Thames Water shareholder could, along with other lenders, play an important role in determining the fate of Britain’s biggest water company, after its parent company Kemble Water Finance defaulted on its debt.

Kemble said on Friday it had requested that its lenders and bondholders take no creditor action, but the development raised the prospect that the utility could face a significant restructure or even ultimately collapse.

Related: Thames Water funding crisis: the key players in the row over its future

Macquarie’s fresh involvement, first reported by the Times, is likely to spark further controversy, after the Australian group came under fire for loading Thames Water with debt and inadequate investment while receiving big dividends during its part-ownership between 2006 and 2017.

Macquarie has defended its stewardship of the utility, arguing that it invested more than £11bn in Thames Water’s network during the period, the highest per customer level of all water companies in England and Wales.

It emerged last week that the group of lenders to Kemble also include the Dutch bank ING, Allied Irish Banks (AIB) and the Chinese state-owned Bank of China and Industrial and Commercial Bank of China (ICBC).

Kemble has a £190m loan that is due to be repaid at the end of this month, but the banks are expected to agree an extension. Late last month Thames Water’s shareholders refused to stump up £500m needed by the end of March, some of which was earmarked to pay the Kemble loan.

Macquarie is thought to have invested £130m in Kemble’s debt in 2018 and 2020, equivalent to about 9% of the company’s debt instruments. This is not part of the £190m due later this month.

A spokesperson for Macquarie said: “We manage debt investments on behalf of long-term institutional investors in a range of infrastructure companies, providing long-term financing for essential infrastructure. Macquarie has not had any control or influence over Thames Water’s operating company since 2017.”

Macquarie sold its remaining stake in Thames Water seven years ago. The utility’s debt jumped from £3.4bn to £10.8bn during the Macquarie consortium-led ownership.

The Australian group is known for buying public infrastructure. It can then charge fees, and receive dividends for its part-ownership, as well as enjoy any increase in the asset price. Estimates have put dividends paid for Thames Water during the Australian bank’s 11-year stewardship at £2.7bn.

Days after Macquarie’s sale of its stake was announced in March 2017, Thames Water was hit with a then record fine of £20.3m linked to huge leaks of untreated sewage for offences in 2013 and 2014.

Wednesday, April 03, 2024

 

Thames Water Debacle: A Lesson in Regulation and Utility Mismanagement

  • Thames Water, the biggest water utility in the UK, was privatized in the last days of the Thatcher regime.

  • Thames Water fell into the hands of private equity investors who borrowed heavily to buy Thames.

  • At the most basic level, a utility has to do three things: raise money at reasonable rates, build large public-serving projects and lastly, to operate these projects effectively.

The big Cambridge-Oxford boat race on the Thames is the posh British equivalent of March Madness. But there was a big problem this year. The Thames is polluted. The oarsmen had to propel themselves in a sea of e. coli. Unlike the citizens of Flint, MI, who had to face years of polluted water, the oarsmen had a choice. They didn’t have to row. But we are not writing about water equity. This is about utility regulation, and how Americans got something right.

Thames Water, the biggest water utility in the UK, was privatized in the last days of the Thatcher regime. The water utilities in the UK at that time faced enormous capital expenditures to bring water supply and waterway pollution up to European standards. The Thatcherites felt it was better to put this financial burden on private suppliers and consumers rather than on the government. These newly privatized utilities would be expected to run more efficiently anyway, and a competitive water market would develop to discipline prices—at least that was the theory. The privatizers ignored a key aspect of the water business. Like other utilities it is extremely capital intensive. This means that cost of capital, largely variable rate interest expense on a highly leveraged capital structure, is one of the biggest items in the water company budget. When they were first privatized this interest expense number that has cannibalized the expense structure was zero. And private investor capital for what is basically a non-investment grade credit costs a lot more than relatively risk free government bond money.  But that’s not our topic either.

Thames Water fell into the hands of private equity investors who borrowed heavily to buy Thames. They subsequently paid themselves billions in dividends (effectively as repayment and profit) despite Thames Water’s enormous capital spending needs. Those investors now refuse to put more equity into the utility, which may have to declare bankruptcy (whatever the British equivalent). Or heaven forbid, be renationalized. Where were the British regulators during this debacle? We get the impression that they didn’t think it was cricket to interfere in the private business affairs of the owners. American regulators tend to meddle, however, making it difficult to extract too much from the utility. US regulators take the view that the utility needs to stay healthy, financially, in order to serve the public. And they don’t like to leave that to chance. An ailing (or greedy) corporate parent of an otherwise solid utility will look for ways to extract cash. Don’t make it too easy.

At the most basic level, a utility has to do three things: raise money at reasonable rates, build large public-serving projects and lastly, to operate these projects effectively. The inability to do any of these three things is or should be disqualifying to a franchise holder. Thames Water says it cannot raise money at reasonable terms, and one might ask if it has built the necessary projects or managed effectively what it operates. One might even argue that Thames is a “dead man walking”, having mismanaged a relatively low risk business to a point apparently beyond financial repair.

One of these days, Thames Water will be taught as a case study in schools of business and public administration— a lesson in dogmatism, light-handed regulation, and lack of common sense. Maybe we should be grateful for our clunky US regulators and seemingly inefficient government utilities for plodding along and doing their jobs. Remember, the tortoise won the race.

By Leonard Hyman and William Tilles for Oilprice.com

Saturday, July 22, 2023

The Privatization of Water Is a Scam
07.22.2023

British water companies have loaded up with debt while pumping sewage into waterways, raising bills and delivering huge profits to shareholders. This can only end by the government taking water back from these corporations.

An aerial view shows the Thames Water Long Reach water treatment facility on the banks of the Thames estuary in Dartford, east of London, on March 3, 2023. (Ben Stansall / AFP via Getty Images)

The neoliberal obsession with privatizing essential industries and services is haunting the UK. Profiteering by gas, oil, railways, mail, and other entities is the root cause of the current high inflation and misery for millions. The water industry has been hoisted by its own profiteering, and Thames Water, England’s largest water and sewage business, is teetering on the edge.

The seeds of destruction were sown by the 1989 privatization. The government sold water entities in England and Wales for a meagre £6.1 billion. In the absence of parallel water and sewage pipes, competition isn’t possible, and companies have captive customers.

The industry has adopted the classic private equity business model. Its key elements are high prices, low investment, and financial engineering to extract high returns. Instead of shareholders making long-term investment through equity, the business model uses debt because interest payments qualify for tax relief — effectively a public subsidy. This reduces the cost of capital and increases returns to shareholders, but also increases vulnerability to interest rate hikes.
Minimum Investment, Maximum Profits

Since 1989, water charges have increased by 40 percent in real terms. Companies seem to have a profit margin of 38 percent, a very high percentage for a no-competition, low-risk business whose raw material virtually falls out of thin air.

Some 2.4 billion liters of water are lost every day to leaks due to poor infrastructure. Despite the population growing by nearly ten million, no new reservoirs have been built. Water companies are required to provide clean water but have actually increased contamination by dumping sewage into rivers. Unplugged leaks and sewage dumping increase profits, dividends, and performance-related executive pay.

A report from the House of Lords estimated that the industry needs between £240 billion and £260 billion of new investment by 2050, compared to £56 billion suggested by the government. However, the industry has been focused on cash extraction. It has paid out £72 billion in dividends since privatization and is expected to pay another £15 billion by 2030. It has debts of around £60 billion. Of each £1 paid to the industry, 38p is earmarked as profit. Out of this 20p services debt, 15p is taken by dividends and 3p for things such as tax.

The focus on investment and efficiency has been low. The industry assumed that it could carry on borrowing at low cost forever. Household bills are inflated to cover the cost of borrowing, which would not be necessary if the regulator, the Water Services Regulation Authority (Ofwat), had insisted on prudent practices.

There is the usual story of regulatory capture or at least cognitive alignment. Around two-thirds of England’s biggest water companies employ key executives who previously worked at Ofwat. Six of England’s nine water and sewerage companies have hired directors of corporate strategy or heads of regulation who previously worked at Ofwat.

For years, red flags have been publicly raised about financial engineering at water companies. In 2018, Ofwat suggested that “gearing” or the debt ratio at water companies should not exceed 60 percent (there is a complex calculation), but companies have resisted that.

Years of regulatory indulgence have been given visibility by the crisis at Thames Water. Thames loses around 630 million liters of water a day in leaks and routinely dumps tons of raw sewage in rivers. Since 2010, it has been sanctioned ninety-two times for failures and has been fined £163 million. Over the last three years, the salary of its recently resigned chief executive doubled.

Since privatization, it has paid £7.2 billion in dividends and has debts of £14.3 billion secured against £17.9 billion of regulated operating assets. In common with other water companies, it has used index-linked bonds for its borrowing, meaning that interest payments rise as general rates of interest increase.

Thames is partly owned by state entities from China and Abu Dhabi, and Ofwat seems to have had no success in securing prudent conduct from its foreign shareholders. Thames Water has a debt ratio of around 80 percent, against the Ofwat recommendation of 60 percent. Auditors PricewaterhouseCoopers routinely gave the company a clean bill of health even though it lacked financial resilience. As the Bank of England increased interest rates, Thames found that it could not make the minimalist required investment and service its debt.

The distress at Thames Water is due to the failure of privatization, profiteering, financial engineering, and customer exploitation. Auditors have been silent. The City of London didn’t care much, and Ofwat has done little to check predatory practices. Interestingly, Cathryn Ross, the current joint chief executive of Thames, is a former head of Ofwat. Its director of regulatory policy and investigations and director of regulatory strategy and innovation are also former Ofwat executives.
Ending the Scandal

There is public clamor for the renationalization of water. However, the Conservative government is unlikely to do that. In 2020, during his campaign to become leader of the Labour Party, Keir Starmer promised to bring the water industry into public ownership but has since reneged. Leaked emails suggest that Labour leadership and water companies have secretly been discussing the possibility of forming “social purpose” companies that would stay in private hands but give greater weight to the needs of customers, staff, and the environment.

Section 172 of the Companies Act 2006 requires company directors to have regard for the interests of “employees,” ‘‘customers,” and “the community and the environment” in making decisions. Water company directors have shown little regard for that duty. The woolly concept of “social purpose” is unlikely to curb rapacious practices.

The toxic influence of shareholders and the dash for maximum returns needs to be checked by public ownership and customer empowerment. Water company shares would be practically worthless if environmental and customer protection standards were to be rigorously enforced. In the event of default, secured creditors are unlikely to get much, and the government can buy the assets cheaply. The cost can be funded by issuing public bonds to local people with the inducement that in addition to interest payments, bondholders will get discounts on their water bills. In addition, customers should be empowered to vote on executive pay. That will ensure that executives face public scrutiny and will not be rewarded for abusive practices.


CONTRIBUTOR
Prem Sikka is an emeritus professor of accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and a contributing editor at Left Food Forward.


P3 PUBLIC PENSIONS FUND PRIVATIZATION
OMERS THE ONTARIO MUNICIPAL EMPOYEES PENSION FUND OWNS 30% OF THAMES WATER 

Thursday, March 28, 2024

UK’s biggest water supplier plunges into deeper financial crisis
P3;PENSIONS FUND PRIVATIZATION

By AFP
March 28, 2024


City of London: — © AFP

Debt-plagued Thames Water has failed to raise a major cash injection from shareholders, it revealed Thursday, blaming industry regulations that made its rescue plan “uninvestable”.

Britain’s biggest water supplier said in a statement that £500 million ($630-million) of new equity would “not be provided by Thames Water’s shareholders” this month.

The cash represented most of a £750-million funding lifeline agreed with investors in July to stay afloat.


The company on Thursday said it was in talks with industry regulator Ofwat over a plan that is “affordable for customers, deliverable and financeable for Thames Water, as well as investible for equity investors”.

Britain’s domestic Press Association news agency said Ofwat had refused to bow to Thames Water’s demands for concessions, which it said included a 40-percent jump in water bills that would worsen the country’s cost-of-living crisis.



Thames Water is Britain’s biggest water supplier – Copyright AFP SAUL LOEB

Other concessions sought reportedly include an easing in capital spending requirements and leniency over regulatory penalties.

– ‘Pursue all options’ –

“Safeguards are in place to ensure that services to customers are protected regardless of issues faced by shareholders of Thames Water,” said an Ofwat spokesperson.

“Today’s update… means the company must now pursue all options to seek further equity for the business to turn around the performance of the company for customers.”

Thames Water, which supplies more than 15 million homes and businesses in London and elsewhere in southern England, is saddled with debts of almost £15 billion that have placed it at risk of nationalisation.


“We prepare for a range of scenarios across our regulated industries — including water — as any responsible government would,” said a statement Thursday from the Conservative administration led by Prime Minister Rishi Sunak.

Steve Reed, environment spokesman for the main opposition Labour party, said “the government and regulators must do everything in their power to stabilise the company and ensure new investment comes through to fix the broken sewage system without taxpayers being left to foot the bill.”

Labour, widely tipped to win a UK general election this year according to several polls, “will strengthen the regulator’s powers and make financial stability a priority to prevent this situation from happening again” should it win power, Reed added in a statement.

Thames Water has faced fierce criticism over missing targets to reduce leaks and slash sewage discharges into rivers, despite major infrastructure investment.

Environmentalists have increasingly voiced outrage at the rise in pollution on the UK’s beaches and waterways, and have pointed the finger at privatised water companies.

Elsewhere on Thursday, researchers revealed that high levels of E.coli, a bacteria found in human waste, had been found in London’s River Thames.

The river will Saturday host the Oxford and Cambridge Boat Race — an annual event featuring competing rowing crews from England’s two oldest universities.

THAMES WATER SHAREHOLDERS INCLUDE OMERS; 
ONTARIO MUNICIPAL EMPLOYEES RETIREMENT SYSTEM

Sunday, December 03, 2023

UK
Thames Water could run out of money by April, auditor warns


James Fitzgerald
Sat, 2 December 2023 

Thames water

Thames Water’s parent company could run out of money by next April if its shareholders don’t inject more equity into the debt-laden utility, its auditors have warned.

The group’s auditors, PricewaterhouseCoopers (PWC), said there is “material uncertainty” about its future because there are no firm arrangements in place to refinance a £190m loan held by one of the company’s subsidiary businesses.

Thames Water is set to face scrutiny over its debt levels and financing structure when its results are published on Tuesday.

Parliament’s Environment, Food and Rural Affairs Committee said it’s considering calling the firm’s executives in to explain whether they misled MPs about the company’s financial situation when they gave evidence in the summer.

The panel’s chair, Conservative MP Robert Goodwill, said on Friday: “Recent revelations of Thames Water’s financial situation raise further concerns about the stability of the company’s finances.”

In June, the water company entered emergency talks with the water regulator Ofwat, ministers and government departments after the exit of its chief executive and concerns over its ability to continue operating without a multibillion cash injection.

At the time, regulators suggested the company could be facing a hole of £10bn in its finances.

The business also faces breaching an interest cover covenant on a separate £200m loan by the same date “under a severe but plausible downside scenario,” PWC said. The disclosure was made in the 2022-23 accounts of Kemble Water Holdings, the top company in Thames’ ownership structure.

Thames Water shareholders have pledged to support the company, with a commitment in writing to inject £750m of further equity into the group. But PWC said that “the letter is not legally binding and there are no other firm commitments to refinance the £190m loan”.

In October, Ofwat said the firm had ‘significant issues’ to address. A spokesman said: “Thames Water must address their operational shortcomings and strengthen their financial resilience.”

The regulator has indicated that shareholders will need to put another £2.5bn into the business between 2025 and 2030.

A Thames Water Utilities Limited spokesman said: “We are in a robust financial position and are extremely fortunate to have such supportive shareholders”.


Two Canadian pension plans risk reputation hit from investments in troubled Thames Water
U.K. utility fiasco plunges OMERS and BCI into the midst of potential rescue plan

Saturday, July 15, 2023

Thames Water Crisis Fragments Industry’s $60 Billion Bond Market
LARGEST INVESTOR IS CANADA'S OMERS PENSION FUND

Tasos Vossos
Fri, July 14, 2023 


(Bloomberg) -- The crisis at Thames Water Ltd. has left the $60 billion market for UK water utility bonds deeply divided.

A measure of the dispersion in spreads in the sector has surged over the past few weeks as investors try to separate companies they see as well run, with manageable debt loads, from those that face the most operational and balance sheet issues. The standard deviation almost tripled after reports of a possible temporary nationalization of Thames Water, before settling at around double typical levels, according to data compiled by Bloomberg.

“Going forward we should see more differentiation in spread terms among various water companies, driven by an increasing focus on operational performance, gearing and amount of inflation linked debt,” said Kshitij Sinha, a portfolio manager at Canada Life Asset Management.

Bonds issued by Southern Water Ltd. and the holding company of Anglian Water — along with Thames Water’s Kemble bonds — saw the biggest spread widening over the past few weeks. Debt issued by Severn Trent Plc had one of the mildest reactions, with only a single-digit increase in the risk premium.

Representatives at Thames Water and Anglian Water didn’t respond to requests for comment. A representative at Severn Trent said they had no comment to add, while a spokesperson for Southern Water also declined to comment on bond spreads.

Thames Water has been engulfed in a crisis as it’s had to borrow more to fund investments in its ailing infrastructure, while soaring inflation in the UK has driven up the cost of servicing its £8 billion ($10.5 billion) of index-linked debt. The company — which serves about a quarter of the UK population — said this week that it is confident of raising further funds after investors agreed to a £750 million equity injection, but UK regulator Ofwat said that there are still “significant issues” to deal with.

And in a sign of industry issues going beyond Thames Water, Southern Water was downgraded by Fitch Ratings last week, triggering clauses in bond documents that forced it to suspend dividend payments.

To be sure, avoiding losses in water company bonds since Thames Water made the headlines in late June would have been difficult, with spreads on the vast majority of issuers widening, based on data compiled by Bloomberg.


Still, the dispersion indicates that investors are starting to pick which companies they see as winners and losers in the group.

“Investors are not going to abandon the sector: these companies are still high-quality, offering attractive returns,” said Canada Life’s Sinha. “However, spreads will start reflecting the risk in the sector, penalizing the constant underperformers.”

Most Read from Bloomberg Businessweek

Thursday, April 11, 2024

JUNK BONDS

Traders Pile Into Cheap Thames Water Bonds on Restructuring Bet


Tasos Vossos, Neil Callanan and Abhinav Ramnarayan
Thu, April 11, 2024





(Bloomberg) -- Money managers are buying up Thames Water bonds that are trading well below their face value, betting that any haircut from a potential restructuring will prove less painful than current trading levels indicate, according to people with knowledge of the matter.

The wager sees investors buy the operating company’s lowest-priced top-tier bonds, which trade at a discount of about 20% or more to the issuance price because of their lower coupon, the people said, asking not to be named. The popularity of the trade has helped the bonds outperform their higher-price counterparts in recent days.

To hedge against the bet not paying off, some investors are also short selling bonds that trade close to face value, the people said.

Holders of Thames Water’s £16 billion ($20.1 billion) of debt are bracing for a potential haircut after the firm’s parent company, Kemble Water Holdings Ltd, defaulted last week. The government is resisting pressure to bring the UK’s biggest water company into special administration, but creditors are concerned that some kind of restructuring is becoming more likely amid a deepening standoff between Thames shareholders and the water regulator Ofwat.

Special administration, a form of temporary nationalization, would likely lead to a debt reorganization which could see senior bondholders having to take a haircut, analysts at CreditSights wrote in a note on Tuesday.

“We have, in the last few weeks, moved some of the higher cash price bonds into lower cash price bonds from a prudent risk management perspective,” said Luke Hickmore, a portfolio manager at Abrdn Investment Management Ltd. His base case is that Thames Water will eventually receive an equity injection.

Short interest has risen sharply in three high-price Thames Water bonds, an indicator of the size of bets against them. In one case, involving a bond maturing in 2028, the wagers now amount to almost 18.5% of the percentage value at issuance, compared to 1.26% at the start of the year, according to data compiled by S&P Global Market Intelligence. By contrast, bets against three low-price bonds remain below 1.4%.

Companies with large amounts of debt often have bonds with wildly differing cash prices because notes are issued over multiple years at different points in the rate cycle. The average coupon size on the lower-price Thames bonds is about 200 basis points below that of the firm’s other debt.

This disparity can become a trading opportunity when an unexpected redemption occurs. In the case of Thames Water, investors are betting that bonds will be redeemed at around 70-85 cents per pound if the company is placed under special administration. This makes any bonds with a cash price below that look attractive, and anything above look expensive. A 100 basis point gap has opened up between the valuations of the two groups of bonds in recent days.

Thames Water’s parent company, Kemble Water Finance Limited, defaulted on about £1.4 billion ($1.8 billion) of debt last week after shareholders refused to provide £500 million of fresh equity. Tight legal and regulatory frameworks mean Thames Water can operate on its own, but a group of creditors at the operating company have hired advisors for help on potential restructuring talks anyway.

CreditSights analysts Helen Rodriguez and Andrew Moulder outlined six different scenarios for the saga at Thames Water, ranging from an eventual equity injection to a break-up of the business. Bloomberg Intelligence analyst Paul Vickars wrote in a note last week that the firm may require a haircut of at least 20% on its Class A debt to comply with Ofwat’s regulations.

--With assistance from Laura Benitez.

Most Read from Bloomberg Businessweek

Tuesday, May 28, 2024

14 billion litres of sewage pumped into the River Thames last year

  • Liberal Democrats uncover “disgusting revelation” from Information Request to Thames Water
  • South West London site suffers from over 500 million litres of sewage in just one day
  • Liberal Democrats call for Thames Water to be “ripped up”

The River Thames has suffered from at least 14.2 billion litres of sewage in 2023, the Liberal Democrats have discovered.

Environment Information Requests by the party has revealed that since 2020, at least 85.9 billion litres of sewage has been pumped into the capital’s river.

Water firms have no legal obligation to report the volume of sewage discharged, only the duration of the discharge.

However, the Liberal Democrats have now found that Thames Water do operate some sewage monitors which measure volume due to an agreement with the Environment Agency.

The capital’s water firm used volume sewage monitors whilst constructing the Thames Tideway project. These are the only known sewage monitors of their kind fitted in the country, and do not cover the entire network. The total volume of sewage discharged into the Thames is therefore likely to be significantly higher than these figures.

It was noted Thames Water also failed to provide data for the month of February.

These sewage monitors have revealed little to no change year-on-year of the volume of sewage discharged from these points, despite promises from Thames Water ofc cleaning up their act. The number of sewage spills also rose year-on-year, from 148 to 255.

The worst incident last year took place at Mogden, South West London, where 558 million litres of sewage was discharged. This was followed by Crossness, where in one day 430 million litres of sewage was discharged.

The Liberal Democrat MP for Richmond Park Sarah Olney has called for Thames Water to be ripped up. The party is calling for the firm to be put into Special Administration, and no longer for profit. Under the Liberal Democrat proposed reforms, Thames Water would become a “public benefit company”, which includes placing environmentalists on their boards and no longer allowing them to put profit before protecting the environment.

Liberal Democrat Treasury spokesperson and Richmond Park MP Sarah Olney said:

This is a disgusting revelation. Despite endless promises by Conservative Ministers and water companies, there is no end in sight to the sewage scandal.

Enough is enough, Thames Water needs to be ripped up and put the environment first. The company is clearly no longer fit for purpose, yet Ministers continue to sit on their hands.

Our environment cannot wait any longer for this government to get a grip of disgraced water firms. Sewage levels and water company profits are soaring under this government’s watch. Frankly, the whole thing stinks.

It is horrifying that these stark figures will be just the tip of the iceberg. Every sewage monitor should measure volume, so we know the full extent of this environmental vandalism.