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Thames Water's biggest shareholder writes off investment

The Canadian pension fund is a sign of escalating financial crises at the UK’s largest water supplier

Author

Lemah Islam
May 17, 2024

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Thames Water’s biggest shareholder writes off investment

The Canadian pension fund is a sign of escalating financial crises at the UK’s largest water supplier

Summary

Thames Water’s biggest shareholder has written off its investment in the utility in a sign of the escalating financial crisis at the UK’s largest water company.

A Singapore-registered subsidiary of Ontario Municipal Employees Retirement System, which holds a 31% stake in Thames Water, said in accounts filed on Friday it would make “a full writedown of [its] investment and loan receivable with accrued interest”

Thames Water has been struggling with rising interest rates on its $18bn of debt and needs £750mn cash injection from its owners by the end of the year to keep running and deliver infrastructure improvements.

The UK’s biggest utility, which serves 16mn customers, has been embroiled in disputes with regulators over water bills, fines and dividends and has failed to reach an agreement with them over its business plan.

Omers, one of Canada’s biggest public sector pension funds, holds its stake in Thames Water through multiple vehicles including its Singapore-registered entity.

Omers Farmoor Singapore PTE owns about a fifth of Thames Water in addition to further stakes held by other Omers entities. The write-down would apply to the overall 31% stake.

Omers and eight other shareholders decided in March not to inject much-needed equity into the business after discussions with regulator Ofwat, saying that the company was “uninvestable”.

Thames Water had asked for a 56% increase in bills including inflation, as well as limits on regulatory fines and leniency on dividend rules. Ofwat is due to produce a draft ruling on June 12 but Thames Water’s owners believe the regulator is unlikely to agree to their demands.

Last month, the water company’s parent group, Kemble, defaulted on its debt. Kembles’s bonds are now trading at less than 10% of face value, implying that its lenders are also braced for a total writedown.

If they withdraw, it will leave Thames Water seeking new investors and running down its cash reserves.

Definitions Section

Words

Definitions

Shareholder

Any person, company, or institution that owns shares in a company’s stock.

Utility

An organisation supplying the community with electricity, gas, water and sewerage.

Subsidiary

a company controlled by a holding company

Accrued Interest

The amount of interest that has been incurred, as of a specific date, on a loan or other financial obligation but has not yet been paid out.

Infrastructure

The basic and organisational structures and facilities, needed for the operation of a society or enterprise.

Bonds

a fixed-income instrument and investment product where individuals lend money to a government or company at a certain interest rate for an amount of time. The entity repays individuals with interest in addition to the original face value of the bond.

Write-Down

Reduction in book of value when its fair market value (FMV) has fallen below the carrying book value and thus becomes an impaired asset. The amount to be written down is the difference between the book value of the asset and the amount of cash that the business can obtain by disposing of it in the most optimal manner.

Fixed-Income Securities

This is an investment that provides a return through fixed periodic interest payments and the eventual return of principal at maturity. The return on fixed-income security is known.

Analysis

If the biggest investors of Thames Water let go of their hands, is much more likely to put Thames Water in a difficult situation.

The problem that the water companies faces is that the interest that they pay on debt is linked to the retail prices index (RPI) measure of inflation. This is usually higher than the consumer prices index (CPI) measure of inflation. For example, in February RPI inflation was 4.5% compared with CPI inflation of 3.4%.

Ofwat estimates that half of the water companies’ debt is linked to inflation and the vast majority of that is tied to the RPI measure.

Who owns Thames Water?

  1. Ontario Municipal Employees Retirement System - 31.8%

  2. Universities Superannuation Scheme - 19.7%

  3. Infinity Investments - 9.9%

  4. British Columbia Investment Management Corporation - 8.7%

  5. Hermes GPE - 8.7%

  6. China Investment Corporation - 8.7%

  7. Queensland Investment Corporation - 5.4%

  8. Aquila GP - 5%

  9. Stichting Pensioenfonds Zorg en Welzijn - 2.2%

Why was Thames Water privatised?

The entire water sector was privatised 34 years ago under the late Margaret Thatcher’s Conservative Government for £7.6bn. At the time, Mrs Thatcher wrote off the industry’s £5bn debt, leaving companies with a clean slate and giving them £1.5bn in public money.

Conclusion

This article shows that Thames Water is in a difficult financial situation at the moment, and they might have to ask for new investment shortly if they lose their investors’ support. 

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