A Tale of Two Cities

Cardiff and London – and their water supplies.

It was the best of times….

Back in 1989, the UK Government under Margaret Thatcher privatised the water industry of England and Wales. Cardiff (and most – but not all – of Wales) was covered by Welsh Water, while London and the Thames Valley was covered by Thames Water.

The privatisation generated £7.6 billion, £5 billion of which was used to clear accumulated debt, with another £1.5 billion provided to the new Companies in an infrastructure investment fund. The new water companies were now debt-free and the UK Government coffers received around £1 billion.

Welsh Water was flush with cash and in 1996 took over the also privatised SWALEC electricity company to form the multi-utility company Hyder, which became Wales’s largest private-sector employer.

Thames Water was also a huge success in attracting investors, and in 2001 was sold to the German utility company RWE.

….it was the worst of times….

Unfortunately, Hyder had overstretched itself and by 1999 was struggling financially, with its share price collapsing in early 2000 to 179p from its earlier peak of 1048p. This then encouraged a takeover battle, with Hyder eventually being taken over in September 2000 by Western Power Distribution. But Western were only interested in the SWALEC electricity business and sold the Welsh Water business to Glas Cymru in 2001 for £1 – but which included responsibility for its £1.85 billion debt.

Meanwhile RWE sold their interest in Thames Water in 2006 for $8 billion to the Australian Macquarie Group. Macquarie then progressively sold off Thames Water to a number of investment and pension companies and since 2016 Thames Water has been owned by Kemble Water Holdings.

….it was the age of wisdom….

Glas Cymru, the owner of the now renamed Dŵr Cymru Welsh Water was established as a not-for-profit Company – a ‘Private company limited by guarantee’. No dividends are paid to shareholders or overseas owners, and all operating surpluses are used to reduce debt, invest in the business, or to return to customers. Glas Cymru has successfully reduced its debt gearing level from 93% in 2001 to 58% in 2021-22 – think of this as the value of your mortgage as a percentage of your house value. Dŵr Cymru made an operating profit of $81 million last year, and it currently has the highest credit rating of any UK utility company.

Dŵr Cymru appears to have a good financial base, and also has a plentiful natural resource – water – which is being supplied to English water companies for little or no benefit (see this previous article).

.…it was the age of foolishness….

Kemble Water Holdings, the owner of Thames Water is a holding company which the Financial Times describes as having a ‘serpentine capital structure’. Its owners currently consists of :

  • OMERS (a Canadian pension fund) (31.8%)
  • Universities Superannuation Scheme (a UK pension fund) (9.7%)
  • Infinity Investment (a UK investment company) (9.9%)
  • British Columbia Investment Management (a Canadian investment fund) (8.7%)
  • Hermes GPE (the manager of UK’s BT Pension fund) (8.7%)
  • China Investment Corporation (8.7%)
  • Queensland Investment Corporation (an Australian investment fund) (5.4%)
  • Aquila GP (an American Infrastructure management firm) (5.0%)
  • Stichting Pensioenfonds (NL pension fund) (2.2%)
  • Others (????) (14.9%)

In its interim report for 2022/23 (6 months to end Sept 2022), Kemble Water Finance Ltd (part of the Kemble/Thames corporate structure) reported a ‘Statutory net debt’ of almost £23 billion (much higher than the widely reported £14 million) and a gearing percentage of 87%. It also reported a net finance expense of £680 million. To put that into perspective, for each of Thames Water’s 9 million customers, it has around £2500 of debt, and every consumer has to pay £150 per year as interest on this debt as part of their water bills.

Thames Water appears to have a very shaky financial situation with a massive debt which needs to be serviced and its institutional shareholders will also be looking for a return on their investments. It is also suffering from a shortage of its basic product – water. It has failed to invest in reservoir capacity over the years and is actively looking to secure future water supplies from Wales. Thames Water is now on the verge of collapse, with the UK Government actively considering nationalisation to rescue it – although it is not clear what will happen to its investors in that scenario. Expect some other English water companies to follow shortly after (Yorkshire Water and Southern Water are believed to be in a similar position).

It is a far, far better thing that I do…

Perhaps more by luck than judgement, Dŵr Cymru has ended up with a stable, sustainable business model that is operated solely for the benefit of its customers. It has protected us from the unrestrained Thatcherite model adopted by Thames Water which is clearly operating only in the interests of its institutional shareholders.

The ‘not-for-profit’ model is ideal for public service companies such as Dŵr Cymru and this model should be extended to Welsh energy and infrastructure organisations. We should also be ready to capitalise on any restructuring of the English water companies – negotiating a fairer return for water supplied to England. But it is unlikely that we can fully capitalise and achieve a fair market price for our water until we achieve independence.

[With apologies to Charles Dickens]

2 thoughts on “A Tale of Two Cities

  1. It was difficult not to mention liquidity ratios, sunk costs or bailout in the article….

    1. What about cash flow, or the directors’ eye watering bonuses ? Could go on and on….

      Speaking of which although the model is fundamentally sounder than the wide boy model as applied to Thames it is still used to fend off legitimate criticism of performance. “Oh look we don’t dish out dividends but plough profits back into the business” is the frequent refrain but they could be ploughing much more back in if they paid attention to the detail of the business. And their role in pollution of water courses doesn’t endear them to this writer even though their friends in the Bay crowd would like to place all blame on farmers and small business

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