plan for collapse of Thames Water

[jpaul]

So is the Thames cleaner than the Seine - hard to believe they can sort the Seine for the outdoor swimming next year, but equally thought that some of the London olympic events had been in the Thames,
don't remember e-coli scares but maybe they 'fixed' that.

 

[jpaul]

New Brexit pivot by Rishi - JRM&Boris will be prostating themselves at his feet :

The EU rules were preventing us filling the sea and rivers with sewerage and putting obligations on the shoddy builders with some monetary obligation for re-wilding and some indirect responsibility for the additional burden new houses would place on the sewerage system,
so we are going to remove those and the builders will now start building new houses for the large waiting list
well, it was large prior to the mortgage rate hike, price drop, builder shortage and building companiesMagratheans going into stasis, sitting on their land prospects

Tourism could be suffering too, Rishi, as they hear about the beaches, the triathlon illnesses etc etc.

 

[Murphy]

Maybe I'm just being dense but can anyone explain how TW has profits while it has debt? I would've assumed any profits would go into paying off the debt so until that's paid off profits should be zero but I'm guessing that's wrong.

 

[413x]

Maybe I'm just being dense but can anyone explain how TW has profits while it has debt? I would've assumed any profits would go into paying off the debt so until that's paid off profits should be zero but I'm guessing that's wrong.

Just like any other company.

 

[Kenai]

Maybe I'm just being dense but can anyone explain how TW has profits while it has debt? I would've assumed any profits would go into paying off the debt so until that's paid off profits should be zero but I'm guessing that's wrong.

I think it's generally pretty normal for big businesses to operate with substantial levels of debt - the extent to which they're loaded up with debt vs equity etc. is why you hear terms like leveraging or gearing.

As long as they're paying those debts back at the times and rates agreed and they don't begin to over leverage themselves, then it's normal operating practice.

Edit - In overly simplistic terms, think of it somewhat like you having a mortgage personally - you don't literally put every penny you earn that isn't spent on food and bills into repaying your mortgage debt until it's gone and have not a single penny of 'disposable income' until that time, you pay it back at the agreed timescale and rates and use your income for savings, cars, entertainment, holidays etc.

 

[Murphy]

But isn't profit what you have left after paying for all the things you need to pay.

e: It just seems really odd to me that a company is/can take on more debt while still making a profit.

 

[b0rn2sk8]

But isn't profit what you have left after paying for all the things you need to pay.

e: It just seems really odd to me that a company is/can take on more debt while still making a profit.

You need profits to service a debt.

Profits don’t usually cover investments, particularly in infrastructure which is paid back over tens of years.

If you need a £200m pipeline to be built but you only make £20m a year, you not going to save up for 10 years and then build it. Your doing to borrow £200m so you can benefit from the pipeline now and get the returns from it now. The idea being the returns now will be more than the cost of borrowing the money.

 

[Mercenary Keyboard Warrior]

Maybe I'm just being dense but can anyone explain how TW has profits while it has debt? I would've assumed any profits would go into paying off the debt so until that's paid off profits should be zero but I'm guessing that's wrong.

Profits are the result of the net result after taking revenue (or income) and deducting costs (or outgoings)

Debts are liabilities that have a cost to service.

 

[adam cool dude]

You need profits to service a debt.

Profits don’t usually cover investments, particularly in infrastructure which is paid back over tens of years.

If you need a £200m pipeline to be built but you only make £20m a year, you not going to save up for 10 years and then build it. Your doing to borrow £200m so you can benefit from the pipeline now and get the returns from it now. The idea being the returns now will be more than the cost of borrowing the money.

Yes but say something comes up and you need a new roof over your house. You get a loan to get it fixed straight away but you don't then continue to have cruises in the Bahamas at the same time. You go to Butlins instead. That is the main difference but when you have no accountability you do what you want.

 

[Murphy]

You need profits to service a debt.

So profit is not what you have left after paying for everything you need to pay for?

Don't get me wrong as obviously taking on more debt while still having more than enough money to run the business is all above board, legal, and all that but from a layman's perspective it seems like an accounting trick, a bit fishy.

 

[GGizmo]

I've never understood why the water industry is privatised.

There is no competition between companies so they balance between making a profit vs investing.

Thames Water leaks 24% through it's pipes. They don't invest enough. There isn't the incentive to do so.

 

[b0rn2sk8]

So profit is not what you have left after paying for everything you need to pay for?

Yes. But debt is effectively a loan which will likely cover multiple years and only elements of it need to be paid back each year. So if everything due that year has been paid, you can have substantial debt and still be profit making. It’s entirely normal.

Don't get me wrong as obviously taking on more debt while still having more than enough money to run the business is all above board, legal, and all that but from a layman's perspective it seems like an accounting trick, a bit fishy.

It’s not an accounting trick, treatment of debts is a well established and has strict rules.

the allegation with TW is that they have loaded the company up with debt and paid out amounts similar to said debt to shareholders as dividends. All while the companies infrastructure is crumbling.

 

[Kenai]

So profit is not what you have left after paying for everything you need to pay for?

Profit is what you have left after operating expenditure - which will include servicing the debt but not necessarily the debt itself

 

[Murphy]

It’s not an accounting trick, treatment of debts is a well established and has strict rules.

Loads of things in accounting have well established and strict rules but it doesn't make them any less of what I'd consider an accounting trick.

Profit is what you have left after operating expenditure - which will include servicing the debt but not necessarily the debt itself

So what you have left after paying the interest on the debt but not the debt itself, a bit like a interest-only mortgage where you spend most of the time paying off the interest.

 

[Kenai]

So what you have left after paying the interest on the debt but not the debt itself, a bit like a interest-only mortgage where you spend most of the time paying off the interest.

Not necessarily just the interest, whatever they've agreed to pay back in terms of interest and principal when they took on the debt.

Debt service refers to the money required to cover the payment of interest and principal on a loan or other debt for a particular time period.

If a business borrows £100k and agrees to repay it at £11k per year for 10 years, then as long as they're paying that £11k, they're all good.

Edit - as @b0rn2sk8 alludes to above, what Thames Waters owners have done is deliberately load the business up with debt so they can pay themselves a fortune, not to invest in the business or their assets. A bit like you re-mortgaging your house so you can go to the Bahamas for a month instead of Butlins - if your lender found out that's what you were doing they'd not be happy, whereas they'd probably have no issue with you re-mortgaging to fit a new kitchen.

 

[Oz!asM!dwinter]

Ah, the private sector. Gotta love it.

Succeed and reap the benefits, fail and let someone else deal with the consequences - win-win if you happen to be top management of a private-public partnership

 

[Oz!asM!dwinter]

What's the worst that could happen if it was nationalised. Politicians could get blamed for incompetently running it. Better keep paying for it to stay private then.

nationalisation - cue a long stream of private 'consultants' and contractors appointed by the government to run their shiny brand new nationalised utility

 

[MCFC_ANDY]

im lucky with welsh water, is run as a not for profit business, not saying doesnt make a profit, but nothing compare to those cowboys in england just ripping folk off with silly bills, as i work and on me own i only pay £14pm

 

[One More Solo]

So profit is not what you have left after paying for everything you need to pay for?

Don't get me wrong as obviously taking on more debt while still having more than enough money to run the business is all above board, legal, and all that but from a layman's perspective it seems like an accounting trick, a bit fishy.

It's really not. If you're servicing debt, what you need to pay is that year's interest and nothing more until the debt falls due. The accounting profit reflects this. The balance sheet will still show a liability for the amount of debt that ultimately needs to be repaid.

The accounting for costs mirrors the accounting for revenue i.e. you only recognise what is earnt/incurred that year.

[This is simplified before other accounting nerds weigh in]

 

[potatolord]

Maybe I'm just being dense but can anyone explain how TW has profits while it has debt? I would've assumed any profits would go into paying off the debt so until that's paid off profits should be zero but I'm guessing that's wrong.

As many have said, you can take on debt, as long as you can service it, and still make profit.

The issue is when a company takes on unreasonable debt and then goes belly-up. See numerous examples in the media over the years...