As this collection of headlines shows, the FT places the importance of Thames Water’s future at the top of its weekend agenda. The article, which I reported on yesterday, makes it clear that USS – the university pension scheme, is key to the ongoing financing of this major utility.
This is a much happier state of affairs than might seem to be the case. Although the short term valuation of Thames Water’s shares must be considerably below what they are marked at in USS’ valuation, the long-term prospects of this utility are based on a 15m captive customer base who want value for money as much as USS trustees and members.
In short, there should be an alliance of interests between a pension scheme and the assets it owns – both should be looking for long-term returns and stakeholder value to both customers and shareholders.
So, though I question whether USS has properly managed its shareholding so far, I see every possibility that it, along with BT pension , Ontario Municipal’s pension and other institutional shareholders, can turn this company around through the exercise of good governance and the establishment of new management under a better social contract.
As part of this, the price of water needs to go up, but extra burdens on consumers must be linked with improvements in the management of sewage and the leakage of pipes. The pension schemes can be a part of this contract.
In short, I see the challenge facing USS, BT , Ontario and others as one of being effective stewards of the asset they own.
This is an important aspect of the diversification of large pension funds into private markets and one I have read little about. If superfunds such as USS are to take 20% stakes in firms like Thames Water, they need to recognise they are no longer silent partners but crucial to the future of the assets they co-own.
Simon Pilcher , USS CIO, is paid a lot of money to manage a lot of money. But with that pay, comes responsibility.
What happens over the next few weeks to Thames Water is to a large degree down to the way that USS and others manage the asset. They must be integrally involved with negotiations with Government and its regulators. It must be a party to whatever solution happens going forward.
If it fails to step up to the challenge and just awaits a Government bail-out , it deserves to be treated brutally and for that brutal treatment to be the responsibility of USS and its investment team.
If it succeeds , creating a better long-term future for Thames Water, USS can rightly point to it using the power of its £90bn fund to make not just its money, but our utility – matter.
The Thames above Harleyford
This looks to me like good money chasing bad. USS must come clean about the cost of its investments in Thames equity and also any Thames-linked bonds it may own. This is, or rather was, their largest investment. USS is not a £90 billion fund, it is closer to £70 billion – they lost some £20 billion last year. Fag packet calculations again suggest this investment was some £1 – £1.5 billion, and it is easy for that to have been higher.
Thames accounts are due by the 15th July – and despite the Chinese whispers that we may see them on or around the 12th, don’t hold your breath.
In fact, we have heard from Thames insiders that the much discussed extra billion of equity will not be sufficient. Fag packet calculations suggest that figure more like £2.5 – £3 billion to weather the next three years.
We have also heard from Thames that they have £4.4 billion in cash. Given that in September they had £1.3 billion and have gross revenues of only £2.3 billion and £500 million of the March equity subscription, the question must be asked where did that comes from, to which the answer is almost certainly additional borrowing – £1 billion, £2 billion? Place your bets!
I agree with Con Keating. Good money chasing bad ones.
USD should write off the equity investment and move on. The company is bankrupt, so we need to have the decency to let it die. We need to reassess what we are paying for as customers. Are we paying for cost of water, and treatment of waste, or we are paying interest to hedge funds and other bondholders?
Existing equity holders have tried to decrease the cost of capital by leveraging the business, and in the same time increase profits by cutting expenses. They were pid handsomely in dividends and share buybacks. Some even managed to exit at a profit, good for them.
For USS, investing more would be stupid.