An annoying feature of almost every report on Thames Water is the intentional puns on “liquidity” and many derivatives of the “fluidity” of the situation. Actually – these jokes are both tiresome and annoying so I’m going to try to keep this blog punchy and pun-free.
The blog is written with Thames Water pensioners in mind, but it should be of interest to a wider audience, including USS members, who are all-in on Thames Water.
History
Thames Water is currently in a terrible place. But it hasn’t always been so. At one time Britain’s water utilities led the world. The deterioration of Thames Water’s service and its financing is a recent phenomenon. It is not a privatisation success story
As the Guardian put it last year
In a little over three decades, Thames Water, the biggest water and sewerage company in England, serving 15 million people, has transformed from a debt-free public utility into what critics argue is a privately owned investment vehicle carrying the highest debt in the industry.
Over those years – as admitted by Sarah Bentley, the firm’s departing CEO – its executives and the shareholders and private equity companies who own it have presided over decades of underinvestment, aggressive cost-cutting and huge dividend payments.
The symptom of these decades can be seen in the scale of sewage discharges, the record leaks from its pipes and the state of its treatment plants – which are now at the centre of a criminal investigation by the Environment Agency into illegal sewage dumping and a regulatory inquiry by Ofwat.
Since it was privatised it has been badly mismanaged. At a Local Government Conference last year, at which Macquarie were presenting their “infrastructure solutions” as investable for LGPS funds, I asked if they had left Thames Water “investable”. Even their slick sales people were unable to pretend that their stewardship of what was our utility was shambolic.
Macquarie left Thames Water with a lot of debt but without the investment in our water infrastructure needed. The result is crippling high debt servicing costs, ongoing repair bills and swingeing fines for the spillages that are making a mess of the south east of England.
Now even its current investors are claiming it is not investable.
Map of recent Thames Water incidents
While it would be unfair to pin all the blame at Macquarie’s door, it was on their watch that the situation Thames Water finds itself in today developed.
Their legacy is today’s problem.
Present
It would seem that the big institutions that own Thames Water (including USS pension scheme) are prepared to weather the storm and see £5bn wiped off the short term valuation of assets , rather than invest more. The term “catching a falling knife” was invented for an investment that is falling in value so fast that it may leave you bleeding as you take a hold. Those sympathetic to the shareholders will include a lot of USS members whose pension scheme’s solvency depends on a Thames Water’s shares eventually returning to their ownership,
Shareholders appear to be holding out either for Ofwat to raise our prices (a 40% hike being at the low end of customer expectations) or for Thames Water to be parked in state ownership for a time, till it can return to the market – somewhat repaired. This looks a high-risk strategy depending on legal arguments that would protect the existing shareholders from losing their shirts.
The GMB is accusing shareholders if blackmailing the country by demanding Ofwat allow price hikes so they can deem Thames Water “investable” (and get some dividends paid)
Catch a falling knife and invest a further £500m or hold the country to ransom? These are not pleasant choices for institutional investors to make.
Either way, it looks like Thames Water as an operation will carry on servicing the needs of its 15m customers and completing its work on projects such as the London Super Sewer, which Londoners have lived with for a decade or more.
This is very much a financial crisis. The important questions outstanding include who will own the debts of the business going forward and that includes any deficit in the pension scheme.
The future for pensioners
I am not a financier but I know a pension debt when I see one. Thames Water has a pension scheme which would cost over £2bn to buy out and £1.8bn to run on.
According to the 2023 the larger of the two pension schemes (TWPS) showed a deficit of £182m while the smaller (TWMIPS) has a £6m surplus . As at 31st Dec 2003, in aggregate its schemes were still in deficit. The cost of buy-out is out of the question and to run on – it will need to continue to find money to service scheme costs.
These numbers assume future support for the Scheme. If no such support can be confirmed , the scheme falls into the PPF and many water-workers will find themselves getting reduced pensions. The scheme had to raise intercompany shares to meet its last pension cash call (£21.4m) last September.
The stage is poised for a white knight to put some backstop capital behind the scheme in return for a share of future surplus. How the deal is done, is a matter for the financiers , but that there is money to do the deal, I have no doubt.
The future of Thames Water is hard to work out, but I’m with the FT’s Lex column that concluded last night
This is the beginning of the end for Thames Water in its current form. The process will still be tortuous and lengthy.
Thames Water’s Pension Schemes need a new sponsor , the sooner the better. Let’s hope there’s a white knight to protect members, the PPF and the long-term interest of shareholders- including USS.