plan for collapse of Thames Water

[dowie]

JRM is certainly pushing for insolvency:

https://twitter.com/x/status/1775249007314362770

To be fair he has got a point - they're running a monopoly, they've paid out large sums to the investors while failing to invest, they've taken a punt with some debt prior to interest rates rising and now those rising rates and their lack of maintenance has come back to bite them.

What they'll then stumble over are the billions in bonded loans, which they will still be legally obliged to repay, along with the costs of improving and then maintaining service. Without private investment, that will come down to public borrowing.

The bonds have fallen significantly which indicates a pretty high chance of them not being repaid (and is perhaps indicative of the risk for the counterparties to any bonded loan too):

Thames Water owner bond slumps to record lows amid uncertainty over firm

Fall to 14.4p comes after shareholders said they were unwilling to inject further funds

www.theguardian.com

The £400m bond, issued by the water supplier’s parent company, Kemble, has slumped to only 14.4p after shareholders indicated that they were unwilling to inject further funds into the heavily indebted utility company.
The group of shareholders had been due to pump in £500m by the end of March but refused to and indicated they were even willing to write off £5bn of investment amid a standoff with the industry regulator Ofwat over Thames’s turnaround plan.
The fall in the value of Kemble’s debt underlines investor uncertainty over the company’s future, in an industry where private companies have been loaded with debt since privatisation in 1989.
The bond, which matures in 2026, has fallen more than 80% over the last year, and halved to only 12.7p after the shareholder update, before lifting slightly to 14.4p.

Remember bondholders (and indeed bonded loan holders) might be a higher priority than shareholders when a company goes bust but they can still be largely (or even completely) wiped out too getting pennies on the pound (thus the fall in bond prices) - only some bonds or bonded notes may be secured and thus higher priority above the other holders of Thames Water debt.

 

[StriderX]

Well no **** they're running a monopoly... we can't build a million pipes just to ensure the free market functions.

 

[ttaskmaster]

The combined debt of all water companies is I believe roughly the same as the combined dividend payout of all water companies (Thames have paid out approximately half the amount in dividends, but then think how much smaller there debt could be if they didn’t spend a quarter of their revenue servicing the 14bn they have racked up). The British public have been utterly stiffed by privatisation, giving a private company a monopoly on a basic need has proven to be most unsatisfactory unless you are a share holder or a foreign company happy to bleed the UK dry.

Thames didn't pay out dividends. Macquarrie extracted them.
A decent owner could have done wonders with privatisation, but the way the market works these days is that it's open and free for all the unscrupulous operators.

To be fair he has got a point - they're running a monopoly, they've paid out large sums to the investors while failing to invest, they've taken a punt with some debt prior to interest rates rising and now those rising rates and their lack of maintenance has come back to bite them.

In their initial submission Thames wanted to invest £16 billion over this current AMP. OFWAT first restricted them to £3bn, and when Thames cut that back to £12bn, they were told they could only invest £4bn.
What else can they do?

Remember bondholders (and indeed bonded loan holders) might be a higher priority than shareholders when a company goes bust but they can still be largely (or even completely) wiped out too getting pennies on the pound (thus the fall in bond prices) - only some bonds or bonded notes may be secured and thus higher priority above the other holders of Thames Water debt.

I'm led to understand that almost all of the company's debt is legally secured in some fashion. That's one reason why the water industry has always gotten decent loan rates since privatisation.

 

[darkgen]

In their initial submission Thames wanted to invest £16 billion over this current AMP. OFWAT first restricted them to £3bn, and when Thames cut that back to £12bn, they were told they could only invest £4bn.
What else can they do?

Do you know what the rationale or logic was behind such a decision by the regulator?

 

[danlightbulb]

Do you know what the rationale or logic was behind such a decision by the regulator?

Regulator (Ofwat) has duties to scrutinise plans and look at efficiency and bill impact. When they looked at Thames' plans they considered a lot of that requested uplift wasn't well justified, so they rejected it.

It's a continual battle between how much companies want to spend and how much Ofwat allow at each price review. Companies always ask for more because the regulator always seeks to lower the expenditure and bill impact.

From Ofwat's perspective they are protecting the customer from inefficient plans by rejecting expenditure with poorly justified/unclear benefits.

Which sounds fair enough. Problem is that it's difficult to justify benefits for some types of schemes until it's too late. Take pipe replacement for example. They just sit there in the ground until one day they fail/leak. If you have thousands of km of pipe in the ground of different ages, what should the replacement rate be? There is so straightforward answer, it's based on a view of risk which different parties can have different views on.

 

[darkgen]

Regulator (Ofwat) has duties to scrutinise plans and look at efficiency and bill impact. When they looked at Thames' plans they considered a lot of that requested uplift wasn't well justified, so they rejected it.

It's a continual battle between how much companies want to spend and how much Ofwat allow at each price review. Companies always ask for more because the regulator always seeks to lower the expenditure and bill impact.

From Ofwat's perspective they are protecting the customer from inefficient plans by rejecting expenditure with poorly justified/unclear benefits.

Which sounds fair enough. Problem is that it's difficult to justify benefits for some types of schemes until it's too late. Take pipe replacement for example. They just sit there in the ground until one day they fail/leak. If you have thousands of km of pipe in the ground of different ages, what should the replacement rate be? There is so straightforward answer, it's based on a view of risk which different parties can have different views on.

OK, that makes a little more sense. I had naively not associated investment proposals versus increased costs to the customer outside of standard inflation costs. I had thought customers bills included the necessary margins for the investments, which makes the current situation even more depressing.

 

[danlightbulb]

I had thought customers bills included the necessary margins for the investments

Customer bills include the current and historic level of investment of the sector, but if there is an increase required for some reason, say a new environmental obligation or increased level of pipe maintenance, then bills have to rise to accommodate the uplift.

There has been a lot of upwards pressure on water sector expenditure over the past 20 years, for example from increased water quality regulations or increased environmental obligations. And also just long term maintenance cycles, for example a huge amount of infrastructure was built in the early to mid 1900's that is now getting very old. That extra money has to come from somewhere. It's normally not paid for upfront by customers, but initially funded via equity or debt and then paid for over a long period of time.

That's why the sector has high debt levels.

 

[ttaskmaster]

Do you know what the rationale or logic was behind such a decision by the regulator?

In addition to what Dan said, it's also about making sure TW does not overinvest, and end up owing so much money that they become insolvent/unstable/whatever.
Problem is, that £16bn was the minimum investment needed to repair and maintain the failing network. OFWAT and risk assessors have tradtionally pointed out that assets had not failed last AMP, so there's no need to fix them in the next one. Part of my job entails surveying those assets and projecting the risk/consequence of failure based on current condition and historic failure modes. Our tolerances are so loose that by the time I decide the trigger points have been hit and it needs fixing, it really does need fixing!

 

[darkgen]

There has been a lot of upwards pressure on water sector expenditure over the past 20 years, for example from increased water quality regulations or increased environmental obligations. And also just long term maintenance cycles, for example a huge amount of infrastructure was built in the early to mid 1900's that is now getting very old. That extra money has to come from somewhere. It's normally not paid for upfront by customers, but initially funded via equity or debt and then paid for over a long period of time.

Even more depressing to think, assuming these cost pressures were applied, the increasing number of sewage discharges (whether through better monitoring or poor maintenance of infrastructure).

In addition to what Dan said, it's also about making sure TW does not overinvest, and end up owing so much money that they become insolvent/unstable/whatever.
Problem is, that £16bn was the minimum investment needed to repair and maintain the failing network. OFWAT and risk assessors have tradtionally pointed out that assets had not failed last AMP, so there's no need to fix them in the next one. Part of my job entails surveying those assets and projecting the risk/consequence of failure based on current condition and historic failure modes. Our tolerances are so loose that by the time I decide the trigger points have been hit and it needs fixing, it really does need fixing!

I'm not too sure what to make of this at all. Clearly "being proactive" is a mantra utterly alien to the water industry.

 

[danlightbulb]

Clearly "being proactive" is a mantra utterly alien to the water industry.

Its a fine line isn't it. Being proactive could mean replacing an asset too soon, when it still has useful life left, and so this is inefficient. But waiting too long to replace assets risks service failures, which is clearly also bad.

The way Ofwat regulates is primarily by comparing all the companies in the sector against each other. They simulate a competitive market by modelling expenditure and efficiency across the sector and using that to estimate cost allowances. So for example if most companies are replacing pipes at say 1% per year, then all companies will get allowances which provide for 1% a year in the round. If Thames needed to replace pipes faster than this, then they needed to justify it well because its an expenditure uplift. If that justification has holes, then Ofwat won't allow the expenditure to protect customers from inefficient spending.

the increasing number of sewage discharges (whether through better monitoring or poor maintenance of infrastructure).

They were always there, just not transparent. Combination of factors such as increased population growth, more rainfall and aging assets means that the problem may be getting worse and it finally needs some money spending. Issue is that the amount of money is huge (sewerage works are big expensive assets). To my knowledge there haven't been any significant expenditure uplifts allowed for this issue before now.

 

[darkgen]

Its a fine line isn't it. Being proactive could mean replacing an asset too soon, when it still has useful life left, and so this is inefficient. But waiting too long to replace assets risks service failures, which is clearly also bad.

The way Ofwat regulates is primarily by comparing all the companies in the sector against each other. They simulate a competitive market by modelling expenditure and efficiency across the sector and using that to estimate cost allowances. So for example if most companies are replacing pipes at say 1% per year, then all companies will get allowances which provide for 1% a year in the round. If Thames needed to replace pipes faster than this, then they needed to justify it well because its an expenditure uplift. If that justification has holes, then Ofwat won't allow the expenditure to protect customers from inefficient spending.


They were always there, just not transparent. Combination of factors such as increased population growth, more rainfall and aging assets means that the problem may be getting worse and it finally needs some money spending. Issue is that the amount of money is huge (sewerage works are big expensive assets).

It just seems or appears the industry has operated in a vacuum since privatisation. As for the factors both you and @ttaskmaster have highlighted; it boggles my mind, the perceived lack of strategy when to comes to population growth, age of infrastructure, need for new and maintained infrastructure, whether new reservoirs, treatment works or whatever else. From a Thames perspective, I'm only aware of a much vaulted, still to be delivered, super-sewer and several treatment stations that appear to be in commissioning limbo. Eh I'm grumpy and my post count in this thread is perverse!

 

[danlightbulb]

It just seems or appears the industry has operated in a vacuum since privatisation. As for the factors both you and @ttaskmaster have highlighted; it boggles my mind, the perceived lack of strategy when to comes to population growth, age of infrastructure, need for new and maintained infrastructure, whether new reservoirs, treatment works or whatever else. From a Thames perspective, I'm only aware of a much vaulted, still to be delivered, super-sewer and several treatment stations that appear to be in commissioning limbo. Eh I'm grumpy and my post count in this thread is perverse!

Did you see the report I posted a few pages back? The UK water sector outperforms several other EU countries on cost and various quality metrics. So its not really true that the sector is standing still since privatisation, its just that you can't fix the infrastructure of the whole country (which was built over 100-150 years) in just a decade or so. There's a huge amount of strategic planning you just wouldn't be aware of it unless you're close to it. There are Government/Defra strategic policy directions, five-yearly business plans and water resource plans, drought plans, strategic resource groups across the country, an industry trade body, an industry research body. Not to mention the other regulators on top of Ofwat such as the Environment Agency and Drinking Water Inspectorate who also have their own regulatory requirements and various strategy groups.

I think the Thames Tideway Tunnel is due to be commissioned soon. Several years of construction and several billion pounds, to try and rectify the sewerage problem in London. Scale that up to the rest of the UK and you can see why the sums of money required are enormous.

 

[ttaskmaster]

Even more depressing to think, assuming these cost pressures were applied, the increasing number of sewage discharges (whether through better monitoring or poor maintenance of infrastructure).

One of the biggest issues resulting in discharges is blocked sewers, which is frequently down to the stuff customers put down there. The pipes often back up to the CSOs before we can even get a team out on site.
Another is the rate at which populations increase compared to how easily and quickly we can upsize the newer network. No-one wants half their town being dug up, but that's what it takes. We frequently find new developments where the developer hasn't even advised anyone that they're whacking a load of new properties onto the network, and then wonder when it suffers hydraulic flooding due to inadequate design capacity... There's an issue here in Reading because someone built Kennet Island on the floodplane, in direct contravention of TW's insistence that it was a ******* stupid idea.
Then you get flooding and damaged infrastructure caused by 3rd parties, such as the genius who drove piles directly into a large reservoir, after being told specifically not to....

I'm not too sure what to make of this at all. Clearly "being proactive" is a mantra utterly alien to the water industry.

Most of what I do is considered proactive, as are many other programmes, but they stall when met by budget constraints or other limitations.
The water shortage issue is another big ongoing one, with everyone asking why we don't just build another reservoir... Ask the council and residents of Abingdon why they've prevented us from doing this for over 15 years.

Its a fine line isn't it. Being proactive could mean replacing an asset too soon, when it still has useful life left, and so this is inefficient. But waiting too long to replace assets risks service failures, which is clearly also bad.

In Germany they replace a pipe the instant it shows a single crack.
Here we don't touch it until it's peppered with multiple fractures, holes and deformation.

So for example if most companies are replacing pipes at say 1% per year, then all companies will get allowances which provide for 1% a year in the round. If Thames needed to replace pipes faster than this, then they needed to justify it well because its an expenditure uplift. If that justification has holes, then Ofwat won't allow the expenditure to protect customers from inefficient spending.

The way Thames justifies it is that they have more of everything in their area. Anglian had engineering issues when they discovered they had a lone pitch fibre pipe on their patch. Thames have several thousand of them.

It just seems or appears the industry has operated in a vacuum since privatisation. As for the factors both you and @ttaskmaster have highlighted; it boggles my mind, the perceived lack of strategy when to comes to population growth, age of infrastructure, need for new and maintained infrastructure, whether new reservoirs, treatment works or whatever else.

The strategy is all there, but the funding is not and the objection from locals is usually substantial.
If you knew just how much it costs to jet out all those sewers and the impact it could have on local traffic, you'd have a heart attack!

From a Thames perspective, I'm only aware of a much vaulted, still to be delivered, super-sewer and several treatment stations that appear to be in commissioning limbo. Eh I'm grumpy and my post count in this thread is perverse!

The Lee Tunnel has been operational from 2016, I think.
The Tideway Tunnel should go operational next year some time.
Both have been massively expensive, but still vastly cheaper than simply cleaning out all the smaller networks, and ought to be more effective too, given the increases in capacity demands.

 

[One More Solo]

JRM is certainly pushing for insolvency:

https://twitter.com/x/status/1775249007314362770

To be fair he has got a point - they're running a monopoly, they've paid out large sums to the investors while failing to invest, they've taken a punt with some debt prior to interest rates rising and now those rising rates and their lack of maintenance has come back to bite them.

Dear God, I agree with him. I don't ever see the utilities companies being renationalised so the best possible to thing to happen would be for one to be allowed to go bust and let the investors take the hit. I'm convinced they've bought in and knowingly overleveraged these companies on the assumption the government would bail them out if the **** hit the fan.

 

[danlightbulb]

I'm convinced they've bought in and knowingly overleveraged these companies on the assumption the government would bail them out if the **** hit the fan

In the case of Thames, it was the previous investors 10-15 years ago that did it. They are long gone.

The new investors will take the hit for something they didn't directly cause nor profit from. But it's on them, they should have done due diligence before buying the company.

 

[StriderX]

Does the investors taking a hit magically solve the pipes blasting **** across rivers and beaches?

 

[ttaskmaster]

Does the investors taking a hit magically solve the pipes blasting **** across rivers and beaches?

Not in the slightest.
It just means you'll be bitching about Rishi's government instead of everyone presuming it's some industry fat cat's salary causing all the problems...

 

[StriderX]

I think that might be a little too generalising as I'm sure there's a fair minority who know privatisation was always an arms-length scam to fool morons into thinking it wasn't always the government's fault.

 

[ttaskmaster]

Given that it was down to the regulator to specify and enforce the conditions of sale such that the likes of Macquarrie did not do exactly what they've done, it ultimately always is the fault of the government.

 

[Uther]

Dear God, I agree with him. I don't ever see the utilities companies being renationalised so the best possible to thing to happen would be for one to be allowed to go bust and let the investors take the hit. I'm convinced they've bought in and knowingly overleveraged these companies on the assumption the government would bail them out if the **** hit the fan.

Me to. I actually feel dirty agreeing with him, but yep, let it go to the wall. An example should be made, although I'll be very surprised if it is allowed to fail, and fully expect us all to just pick up the bill.