It’s
a
stark
reminder
of
our
dependence
on
good
utility
companies
that,
rather
than
learning
of
problems
with
the
local
water
from
the
news,
residents
in
the
south
of
England
found
out
first-hand –
when
they
saw
human
detritus
floating
down
the
street.
This
is
certainly
the
case
in
Berkshire, but
the
problem
is
bigger
than
that.
Buckinghamshire
residents
have
also
noted
serious
problems
with
drainage
and
disposal.
There
are
multiple
other
such
cases
across
the
South
of
England.
Unfortunately,
the
situation
itself
is
just
a
snapshot:
of
a
utility
company
on
the
brink,
and
public
confidence
in
UK
utilities
draining.
Thames
Water
is
the
company
at
the
heart
of
the
saga.
It
has
drawn
increasing
fire
over
many
months,
not
just
over
a
mismanagement
long
documented
by
journalists
and
MPs,
but
as
a
case
study
in
privatisation
gone
wrong.
35
years
after
it
was
taken
out
of
public
ownership
by
the
Thatcher
government,
Thames
Water’s
owners,
Kemble
Water
Utilities,
and
its
shareholders
(among
which
is
the
University
Superannuation
Scheme,
one
of
the
UK’s
largest
pension
funds)
should
be
celebrating.
Instead
it
is
staring
down
the
barrel
of
collapse,
after
a
standoff
with
the
regulator
Ofwat,
which
refused
to
allow
the
cost
of
an
improvement
plan
to
be
passed
onto
customers
via
huge
price
hikes.
In
a
bid
to
reassure
customers,
chief
executive
Chris
Weston
claimed
it
was
“business
as
usual”
at
the
firm.
But
if
it
cannot
find
liquidity,
the
company
could
pass
back
into
government
hands
via
a
Special
Administration
Regime.
In
plain
English:
renationalisation.
Why
Did
Thames
Water
Get
into
so
Much
Debt?
Thames
Water
is
the
UK’s
largest
water
company,
so
could
be
perceived
as
something
of
a
bellwether
for
the
health
of
UK
water
provision.
At
a
time
of
serious
environmental
introspection
and
shareholder
activism,
water
companies
have
been
battered
by
negative
headlines
anyway,
amid
allegations
of
sewage
dumping
and
the
issuance
of
hefty
fines.
As
Thames
Water’s
own
balance
sheet
looks
so
unhealthy,
analysts
at
Morningstar
DBRS
argue
a
default
will
turn
investor
confidence
sour –
and
result
in
precisely
what
Ofwat
is
attempting
to
avoid.
“Thames
Water’s
balance
sheet
has
been
stressed
because
of
its
significant
debt
load,
with
approximately
£15.7
billion
of
debt
at
the
utility
and
another
£2.4
billion
at
intermediate
and
holding
companies,”
say
Tom
Li,
senior
vice
president
and
sector
lead
for
corporate
ratings,
energy
and
natural
resources,
and
Chloe
Blais,
assistant
vice
president
for
european
corporate
ratings,
energy
and
natural
resources
“We
note
the
UK
government
has
been
preparing
an
emergency
plan,
codenamed
‘Operation
Timber’
if
it
needs
to
temporarily
take
over
the
business
under
a
SAR.
In
the
event
Kemble
Water
defaults
on
its
£190
million
debt
obligation
in
April,
investor
sentiment
in
the
UK
water
sector
could
turn
negative
and
sector
funding
costs
could
rise.
“Furthermore,
customer
bills
for
other
UK
water
utilities
could
increase
materially
as
they
have
requested
significant
hikes
to
fund
their
proposed
business
plans
too.”
But
investors
could
be
forgiven
for
asking
how
this
all
happened
in
the
first
place.
Among
other
factors
was
a
complacency
about
low
interest
rates,
says
Lindsey
Stewart,
Morningstar’s
director
of
investment
stewardship
research.
“I
think
people
just
got
too
used
to
the
idea
of
super-low
interest
rates
and
overlooked
the
risk
that,
you
know,
interest
rates
could
normalise,”
he
says.
“We’re
now
in
a
position
where
they
have
high
debt
and
it’s
so
much
more
expensive.
I
think
it’s
fair
to
say
that
risk
was
overlooked”.
Now
is
Not
a
Good
Time
to
Nationalise
a
Company
It’s
unlikely
nationalisation
will
hit
the
broader
UK
utilities
sector,
however
–
if
it
happens
at
all.
A
general
election
is
due
this
year,
and
polling
currently
points
to
the
Conservatives
losing
office
when
the
country
goes
to
the
ballot
box.
“In
the
event
Thames
Water
is
placed
under
an
SAR,
we
do
not
believe
financial
contagion
will
spread
to
the
other
UK
water
utilities,”
Morningstar
DBRS
says.
“Water
utility
shareholders
have
largely
supported
turnaround
plans,
and
a
number
of
them
have
injected
additional
equity
over
the
past
few
years.
“While
Kemble
Water
and
Thames
Water
also
received
£500
million
from
their
shareholders
in
March
2023,
this
was
in
the
form
of
an
8.0%
fixed-rate
convertible
loan
note.
“Additionally,
while
there
have
been
calls
for
the
sector
to
go
back
to
the
government’s
control,
we
believe
this
is
unlikely
at
this
time
with
the
upcoming
election
in
the
UK
and
the
significant
cost
to
do
so.”
More
to
Privatisation
Than
Meets
The
Eye
Neville
White
agrees,
albeit
for
different
reasons.
A
consultant
and
former
head
of
responsible
investing
policy
and
corporate
governance
at
EdenTree
Investment
Management,
he
says
the
business
model
was
unique,
and
in
all
the
wrong
ways.
“Water
is
local,
so
although
it
was
privatised,
it’s
a
natural
monopoly,”
he
says.
“You
know,
I
can’t
buy
my
water
from
Anglian
when
I
live
in
the
Thames
region.
So
in
a
way
privatisation
was
a
little
bit
of
a
nonsense
in
terms
of
providing
competition.
I
think
it
was
always
around
investment.
“What
went
wrong
in
my
view
is
some
of
the
ownership
structures
were
not
properly
thought
through.
So
privatisation
didn’t
provide
for
the
right
kind
of
owner.”
There
are
other
examples
of
things
going
better,
however.
Investors
should
note
the
case
of
Wessex
Water,
whose
footprint
covers
the
south
west.
“It’s
owned
by
a
single
sovereign
wealth
fund.
It’s
been
a
single
long
term
patient
capital
investor
for
25,
30
years,”
says
White.
“That
strikes
me
as
a
very
robust
model
for
taking
a
company
in
the
water
sector
private.
They
put
in
equity
when
they’ve
needed
to.
It’s
well
financed,
it’s
some
problems
because
the
whole
industry
has.
But
essentially
the
model
was
not
to
just
take
money
out,
it
was
to
run
it
as
a
long-term
patient
capital
vehicle.”
As
for
the
election
and
renationalising,
he
isn’t
convinced.
“Personally,
[I
think]
if
Thames
Water
was nationalised
tomorrow,
say
by
a
Labour
government,
suddenly
that
government has
got to
find
billions
of investment to
put
in,”
says.
“So I
still
think
that
a privatised model
that
delivers
investment
in
the
infrastructure,
but
providing
a
reasonable
rate
of
return
on
capital
for
investors
is
the
best
model
even
though
it’s
an
actual
monopoly.”
Should
I
Be
More
Cautious
About
Dividends
Now?
It’s
still
rare
to
see
the
issue
of
dividend
payments
thrust
so
firmly
into
the
public
eye,
but
in
several
recent
cases,
the
payment
of
dividends
by
large
companies –
to
the
alleged
detriment
of
other
projects –
has
prompted
a
more
explicit
conversation
about
corporate
governance,
corporate
and
social
responsibility,
and
ethics.
Now
an
unlikely
consumer
champion,
comedian
Joe
Lycett
took
on
this
issue
in
a
2024
documentary
that
urged
UK
water
companies
to
stop
paying
dividends
while
infrastructural
problems
were
so
severe.
In
the
case
of
Thames
Water,
former
owner
Macquarie
has
been
accused
of
using
its
assets
to
pay
dividends
to
shareholders,
to
the
neglect
of
fixing
long-standing
leakage
and
infrastructure
problems.
White
agrees
with
this.
“I
think
[the
business
model]
was
pretty
broken
to
start
with
in
the
sense
that,
when
Macquarie
owned
it,
[they]
just
leveraged
up
the
debt
and
used
the
assets
to
pay
dividends,”
he
says.
“So
basically
they
took
out
debt
against
the
the
security
of
the
assets
and
then
paid
themselves
a
lot
of
dividends.
So
the
investment
wasn’t
there.”
Should
investors
therefore
be
more
cautious
about
companies
paying
dividends?
The
UK
is
home
to
some
real
dividend
stalwarts,
after
all
(see
chart
above).
“It’s
certainly
something
people
should
think
about
if
they’re
investing
in
a
company,”
Stewart
says.
“How
are
those
dividends
being
financed?
Are
they
being
financed
by
the
continuing
operations,
profits
and
cash
flows
of
the
business,
or
is
the
management
just
exchanging
equity
for
debt
and
paying
dividends
out
of
that?
“A
couple
of
years
ago
there
were
some
questions
asked
as
part
of
a
wider
consultation
on
the
capital
management
regime,
[including]
how
do
you
ensure
the
management
of
the
company
isn’t
tunnelling
out
underneath
creditors
and
debitors
and
other
stakeholders
by
paying
inappropriate
dividends?
“We
didn’t
get
too
far
resolving
that.”
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