England water company finances worry as interest rates rise on big debt, expert says | Water

Water companies are struggling to keep their finances in order as interest rates rise on huge debts they have taken on to pay dividends, according to a leading economist.

Dieter Helm, a professor of economic policy at Oxford University and an adviser to governments, said water companies had worrying signs about their financial stability as the economic crisis drives interest rates higher.

When privatized in 1989, the nine English water companies had no more debts. Between 1991 and 2019 they ran up £52billion in debt, according to an analysis. Last year debt had reached £56.2bn, with Ofwat warning of concerns over the financial resilience of the sector.

Helm said rising interest rates on these huge debts now put these companies in a dire situation. “In effect, the companies mortgaged their assets and then paid out the mortgage money in the form of dividends, share buybacks and special dividends. Great financial engineering followed. he said.

Yorkshire Water last week announced an equity injection of nearly £1billion from the repayment of intra-group debt after Ofwat raised concerns about its fragile balance sheet and ability to provide a essential public service. Shareholders have been asked to provide an additional £100m to reduce spills from storm overflows.

Southern Water, which was fined £90million for discharging billions of liters of raw sewage into the sea, was saved last year with a £1billion cash injection sterling from Macquarie, the Australian asset manager.

Both companies have high debt levels, with the company’s debt to equity ratio at 77% for Yorkshire Water and 71% for Southern Water in March 2021.

Helm said: “There are worrying signs from businesses as they struggle to keep their finances in reasonable order as interest rates rise and only tackle their current obligations.

“Two – Southern Water and Yorkshire Water – required large capital injections to keep them afloat, and Thames Water was unable to meet its obligations satisfactorily, although it passed on payment of the dividends for several years.”

He said that the water sector had reached a very unfortunate and unsustainable situation, characterized by drought, sewer overflows, the banning of garden hoses and public outrage over the remuneration of leaders. “Add in rising interest rates that are starting to eat away at all the debt incurred by mortgaging corporate assets rather than investing, and it’s hard to avoid the conclusion that the wheels are starting to fall off of the corporate privatization model. origin, and is no longer fit for purpose,” Helm said.

The regulator has warned water companies not to impose costs on customers, who are struggling with the cost of living. In a letter to businesses on Tuesday, Ofwat said they needed to mitigate any significant inflationary increases in customer bills for 2023-24.

Yorkshire Water and Thames Water are among five water companies being investigated by Ofwat and the Environment Agency over ‘credible’ evidence of potentially illegal dumping of untreated sewage into waterways. rivers and waterways.

Ofwat opened a separate runtime folder against Yorkshire Water over the fragility of its finances and whether it had the necessary resources as a provider of essential public services. The Ofwat share was closed after the injection of £940 million in the repayment of intra-group loans announced last week.

This summer, Thames Water announced a injection of £1.5bn by shareholders in the business as it tried to cut debt and improve performance amid an outcry over sewage pollution.

Ofwat rules state that a company will be put into ‘cash lock up’ and denied permission to pay dividends if it exceeds a certain threshold, notably if the credit rating of the issuer of the business (as defined by the license) falls below investment grade, according to a Freedom of Information response to Ash Smith of Windrush vs. Sewer.

Helm said regulators are as responsible for the state of water companies as the companies themselves. “No amount of lobbying and shifting blame will get the industry and its regulators off the hook.”

He said a zero tolerance approach was needed for raw sewage discharges. “No water company should be allowed to discharge raw sewage into rivers, period,” Helm said. “Doing this should be treated as a serious, reportable pollution incident. On rare occasions this might happen, but it would be in truly very exceptional circumstances, and not in the normal course of water company business. This would be supported by a river monitoring system that would detect any such occurrence.

Analysis published last year by David Hall of the University of Greenwich’s Public Services International Research Unit (PSIRU) found that over the past 11 years, while water spillage problems raw sewage rose, England’s nine water companies paid shareholders a total of £16.9 billion in dividends, an annual average of £1.4 billion.

Yorkshire Water said: “We understand the importance of continuing to have strong financial structures and the repayment of business-to-business loans will maintain our resilience going forward. We have agreed with Ofwat that the loans, totaling £940m, will be repaid before the end of March 2027 and this will likely include capital injections from shareholders.

Sarah Bentley, chief executive of Thames Water, said she had launched a turnaround plan since joining in September 2020 and the company had made good progress in addressing structural issues. “However, everyone at Thames is aware that we are only at the beginning of our journey and there is still a lot to do and deliver. We are also aware that none of the programs can be executed without significant capital investment. With this substantial new equity investment program, our shareholders are both supporting the investment that is essential to our improvement and also expressing their confidence in the long-term prospects of Thames Water. We warmly welcome their continued support.

A spokesman for Southern Water said: ‘The vast majority of our debt is fixed and therefore not influenced by changes in interest rates.

“Thanks to the commitment of our new majority shareholder in Southern Water, after an initial injection of £1 billion, we are investing £2 billion between 2020 and 2025 to further improve our network. This money is spent to repair, upgrade and expand our network of pipes, pumping stations and sewers that make up our vast water and wastewater infrastructure.

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