This blog is about the competing interests for the long-term revenues of Thames Water.

JP Morgan have furnished the FT with a chart showing who owns what at Thames Water. It shows USS owning 9.1% of the equity , though I think that should be 19.7%.

As can be seen, the majority of Thames Water is owned by pension funds. This makes Government decision making around Thames Water complicated. Government wants pension funds to invest more rather than less in companies like Thames Water.

Whatever the market capitalisation of Thames Water , it looks to be dwarfed by it’s debt – reckoned to be nearly £16bn. How such debt can accumulate since privatisation is another story and a chastening lesson for those who consider private ownership a social good.

In July 2020, the Guardian ran an article on research carried out by Greenwich University which concluded

“A large amount of debt has been borrowed. But since the revenue from user charges covered capital expenditure, this debt has been used to finance dividends rather than capital expenditure,”

Thames appears high on the table of shareholders rewarded (figures to 2019)

Because of the complicated ownership structure, statements have been made over shareholder distributions recently, that may have been misleading. Thames Water claims that shareholders haven’t been paid a dividend in five years

Follow up  reports by the University of Greenwich examine the complexities of the ownership structure and suggest that despite statements to the contrary, shareholders continue to extract money

Dividends paid out dipped in 2019, but rose again in 2020 to £1.4bn, in line with the average over the period. Figures for 2021 so far suggest another dip, to £0.5bn., but final figures for the year maybe significantly higher

There is evidence that the companies are using three simple devices to try and conceal the true level of dividends: deferring the payment of dividends, claiming that they are not paid to ‘ultimate parents’ and so somehow less significant, or by the illusory argument of ‘round-tripping’.

The true level of dividend payments is estimated to be over £0.5bn., using company data tucked away in footnotes and elsewhere: more than double the ‘headline’ figures publicised by the companies.

This may explain a  policy change that the water regulator announced in March. The change enables Ofwat to stop shareholders paying themselves dividends if these would put the company’s financial health at risk. Thames Water’s former owner, Australian investment powerhouse Macquarie, took out nearly £3bn in dividends during its 11-year ownership period.

Most of the £15.9bn debt issued by Thames Water is  a legacy of its 2006 leveraged buyout by Macquarie. Of that amount, £14.5bn takes the form of a whole-business securitisation to buy the business and the rest money lent to Kemble. A further £1.5bn is expected to be stumped up by shareholders of which only £500m has arrived, this is the immediate cause of the cash-flow problem.

Equity holders are being asked to service the debt created by previous equity holders. Small wonder many members of USS and other pension schemes are scratching their heads as to why their funds invested in Thames Water.

Consumers should be scratching their heads about how a company that was privatised with no debt, is now on the brink because it cannot service its debt.

Should investors be bailed out?

Why have the big pension funds invested in Thames? The easy answer is

highly regulated assets with predictable cash flows

Right now, it appears that the cashflows are far from predictable and the Regulator – Ofwat, does not look likely to protect shareholders.

This is one of many messages I received after writing about Thames Water yesterday

You have to wonder how much effort and money was spent by U.K. pension funds investing in Thames Water.

But seems an ideal case for letting normal rules apply (as didn’t happen with the banks of course). Let it go bust. Investors lose. Perhaps someone will buy it. Government might have to ensure all functions are maintained. Just don’t rescue the investors.

And I suspect that there is little appetite among the general population to bail out investors who considered that a highly regulated business with predictable cash flows couldn’t go bust. That assessment misses the warnings that Greenwich and others had been flagging.

Thames Water appears to be so highly leveraged that the only thing worth owning is its debt. We do not know how much of its debt pension funds own, there is no published list of bond-holders. But despite bonds standing in front of equities in the event of Thames going bust, 15m people stand ahead of the bondholders – they are the people who pay their water bills.

For consumers,  all Thames Water needs is sound operational management. They have  no responsibility for the kind of financial chicanery which has driven Thames to the brink, nor has the tax-payer.

Government should be brutal. Private investment carries risks and if those risks weren’t foreseen, then “caveat emptor”.

Institutional investors cannot be deemed “vulnerable”. The interests of consumers must be prioritised.