On The Discrepancy Between OMERS and USS's Writedown on Thames Water
One of the biggest investors in Thames Water has slashed the value of its stake by nearly two-thirds, intensifying doubts over the financial health of the UK’s largest water distributor.
The Universities Superannuation Scheme, a UK pension fund serving more than 500,000 university sector members, holds almost 20 per cent of Thames Water’s parent entity, Kemble Water, through an investment vehicle.
In the year to the end of March 2023, the USS’s stake in Kemble was valued at £364.4mn, compared with £955.8mn the year before, according to financial accounts published on December 30.
The 62 per cent writedown, revealed in the annual corporate filing for the USS’s Church Water Investment, comes as Thames Water is seeking to raise new equity of £2.5bn over the coming years from shareholders, including pension and sovereign wealth funds, in addition to £750mn already pledged but subject to conditions.
The writedown is also more than double the cut taken in percentage terms on Thames Water in 2022 by the utility’s biggest investor, the Ontario Municipal Employees Retirement System, one of Canada’s biggest public-sector pension funds.
Tim Whittaker, director at Edhecinfra, a research institute and data provider, said USS’s decision was “probably difficult but necessary”.
“Better late than never,” he said. “It’s obvious that the risks inherent in the business — but under-appreciated just a few years ago — are now being realised.”
Thames Water faces more than £1bn in debt repayments by the end of 2024, including a £190mn facility in Kemble Water Holdings that matures in April, according to the utility’s accounts published in November last year.
Last month, Thames Water appointed Chris Weston, the former head of power supplier Aggreko, as its chief executive, as the water company faced parliamentary scrutiny over its financial health and probes into its treatment of sewage. Ofwat, the regulator, is also investigating a £37.5mn dividend Thames Water paid in October and which it said ultimately reached its parent entity.
Shareholders have asked for restrictions on regulatory fines as one of the conditions for injecting new equity. Thames Water has asked Ofwat for a 40 per cent increase in customer bills by 2030 to underpin the promised £750mn investment.
The near-£600mn year-on-year writedown on USS’s stake is the biggest hit taken by the £75bn pension fund on its Thames Water holding, first made in 2017.
The USS said in a statement to the Financial Times that the challenges facing Thames Water were the “manifestation of historic under-investment over multiple decades and, more recently, the significant financial impact of soaring energy prices and other inflationary cost pressures”.
“However, we have given our backing to Thames Water’s latest business plan,” it said.
The USS added: “While the value we place on our Thames investment may go up or down as part of our regular revaluations, we continue to view this as a long-term investment, in line with the long-term needs of the scheme. That is why we were willing to commit additional funds to the business in March 2023 and have shown willingness to commit more in the future.”
In a note to the 2023 financial accounts, Church Water said its investment in Kemble was held at “fair value”, which was arrived at using a market approach that may include macroeconomic forecasts, “debt financing, growth and profitability prospects for the asset”.
In July, the FT reported that Omers, which owns a 31 per cent stake in Thames Water, valued its stake at £979mn at the end of 2021, before reducing the value to about £700mn in 2022.
Omers declined to comment on USS’s valuation cut.
Thames Water said in a statement that it was in a “solid financial position” and had “supportive shareholders” that have “agreed conditionally to provide a further £750mn in new equity”.
It added: “The Thames Water and Kemble boards approved our refocused turnaround plan at the end of 2023. We submitted our business plan to Ofwat as part of its price review process in October 2023 and will receive a draft determination from Ofwat in May/June 2024 and a final determination in December 2024.”
John Crace of the Guardian also reports Thames Water’s second largest investor slashes value of its stake:
One of the biggest investors in Thames Water has slashed the value of its stake in the debt-laden utility by almost two-thirds, weeks after the company admitted that it does not have enough money to make its debt repayments.
A fund controlled by Thames Water’s second largest investor, the University Superannuation Scheme (USS), reported a loss of almost £600m last year after writing down the value of the embattled water company as it struggles to shore up its balance sheet.
The USS, the largest private pension fund in the UK, holds a 20% stake in Thames Water’s ultimate parent company, Kemble Water, mostly through its subsidiary Church Water Investment.
The investment vehicle said the value of its stake in Kemble had fallen to £364m last year from £956m in 2022. This could imply that the value of Britain’s biggest water company has plummeted from almost £5bn in 2022 to £1.9bn last year.
The second major write-down of Thames Water’s valuation in recent months follows cuts made by the company’s largest shareholder, Ontario Municipal Employees Retirement System (Omers), in July last year.
One of Canada’s biggest public sector pension funds revealed a one-third write-down after reporting that its 30% stake in Kemble had fallen from a valuation of £979m at the end of 2021 to about £700m in 2022.
A spokesperson for USS said the fund continued to back Thames’s turnaround plans and would provide “patient capital” to support the “long-term needs” of the company.
Thames’s mounting financial woes have cast doubt over the future of the company as it struggles to raise the funds needed to tackle a debt pile of around £18bn and increase investment to tackle sewage overflows and water leaks.
The company, which serves about 25% of households living in England, admitted to MPs late last year that it does not currently have enough cash to cover its debt repayments. It faces repayment deadlines for £1.4bn debt in the coming years, including £190m in April.
Fears for the future of Thames reached fever pitch last summer after its former chief executive Sarah Bentley resigned and it emerged the government was drawing up rescue plans in case an emergency re-nationalisation was required. The company last month appointed Chris Weston, a former British Gas executive, as its new boss with a pay package of up to £2.3m a year.
USS said: “The challenges facing Thames Water are the manifestation of historic under-investment over multiple decades and, more recently, the significant financial impact of soaring energy prices and other inflationary cost pressures. However, we have given our backing to Thames Water’s latest business plan.
“As a long-term investor, we can provide patient capital and be an active, responsible steward of the company. While the value we place on our Thames investment may go up or down as part of our regular revaluations, we continue to view this as a long-term investment, in line with the long-term needs of the scheme.
“That is why we were willing to commit additional funds to the business in March [in 2023] and have shown willingness to commit more in the future.”
Thames failed to reach its goal of securing £1bn in emergency funds last July, after its shareholders agreed to make £750m available to shore up the company’s balance sheet until 2025. It has emerged that around £500m of this package is a loan which will require interest payments of 8%.
The USS spokesperson added: “We have not received a shareholder dividend or payments of interest on any shareholder loans since we first invested in 2017, with shareholders instead re-investing capital back into the business to drive improvements.
“We remain of the view that, with an appropriate regulatory environment, the long-term objective of repairing important UK infrastructure and paying pensions to our members are in strong alignment.”
In July, I wrote a lengthy comment on whether OMERS and BCI will drown along with Thames Water, highlighting the multitude of problems with this investment.
I'm not a big fan of Thames Water, think the Macquarie boys made a killing off it by stripping its assets and never reinvesting in it, and OMERS, BCI, USS and other investors need to plow a lot of money in this dead horse to reform it.
Any way you slice it, it's a problem investment, all pension funds run into these problems once in a while which is why they need to be diversified at all times.
Now, in terms of the writedown, I must admit, the 62% writedown USS is taking on its Thames Water investment seems hefty, very hefty, especially when compared to the 28% writedown OMERS is taking.
So who is right? Why is there such a discrepancy in valuation of the same exact asset?
You'd think accountants valuing this asset aren't a bunch of incompetent bozos and they can come up with a valuation all shareholders agree on.
This is the type of stuff that fuels conspiracy theorists who think pension funds have too much leeway in valuing private market assets.
The truth is maybe both USS and OMERS are right but they need to come clean with the methodology they are using to value Thames Water.
Again, for me, taking a 62% writedown seems excessive, they are writing it down huge now to write it up big in the future once the turnaround plan materializes.
That's my gut feeling.
Conversely, OMERS might be too optimistic in its valuation of Thames Water but a 28% writedown isn't anything to sneeze at and it will impact the performance of OMERS Infrastructure in 2022.
Either way, I don't like this investment, never did and never will.
It's not the end of the world for either OMERS, USS, BCI and other investors but it's just a reminder that some of these heavily regulated infrastructure assets can lead to a pack of problems and require massive capital infusion to turn them around.
That's my two cents on Thames Water, if it were up to me, I'd dump it all, but I realize this asset is a long-term play and if the turnaround is successful, they will write it up huge in the future.
Those are the valuation games pensions play, I just wish they were more transparent about their methodology.
Below, this week we discovered Thames Water’s second largest investor has slashed the value of its stake. USS says Thames Water's woes are the 'manifestation of historic under-investment'.
Watch as Professor David Hall explains the dodgy debt dealings of the privatized water companies, as they make huge payouts to their shareholders.
I don't agree with David Hall, some shareholders are better than others and you need them to invest in these assets over the long run, but I understand the frustration here and why he feels that UK citizens would be better off without them.
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