Thames Water lost almost two-thirds of its value last year as the struggling utility group came close to collapsing under the weight of its debts, figures from its second-largest shareholder show.
Church Water Investment, which holds 20% of Thames' parent company Kemble Water Holdings, wrote down the value of the stake by 62%, according to annual accounts to March 2023. The numbers were released on Dec. 30.
Church Water is the investment vehicle for the Universities Superannuation Scheme, the U.K.'s largest private pension fund, which looks after the retirement benefits of Britain's academics and has £75 billion ($94.7 billion) of assets under management.
The writedown amounted to a loss of £591 million for USS and implies the Thames business — which USS valued at almost £5 billion in March 2022 — was worth just £1.9 billion one year later.
Thames' ultimate holding company Kemble is battling for survival amid concerns it will be unable to repay its debts. Last month, its auditor warned of "material uncertainty" about the group's future on fears it may be unable to refinance a £190 million loan in one of several Kemble subsidiaries.
Failure could lead to Kemble's insolvency and result in Thames Water Utilities Ltd., the operating company, being taken under the control of industry regulator Ofwat. Thames provides water services to 16 million people in the south of England.
"Thames Water Utilities Limited is in a solid financial position and has supportive shareholders," it said. "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."
The scale of the writedown in March 2023 suggests Thames' situation rapidly deteriorated early last year. In annual accounts to Dec. 2022, Kemble's biggest shareholder, Canada's OMERS pension scheme, wrote down its own holding by a third. USS's adjustment was twice as big.
However, the EDHEC Infrastructure & Private Assets Research Institute, a research center affiliated to the French business school EDHEC, said write-offs were inevitable because the business had "been mis-priced for several years."
Faulty private-asset valuation methodologies and a willful blindness by investors to "fall in love with your position" led to the valuation being upgraded in March 2022, EDHEC said, when a more rigorous valuation model would have revealed the business had already lost as much as half its value.
In a research paper, EDHEC said numerous "red flags" were ignored and laid much of the responsibility for Thames' troubles with Ofwat. The regulator set the cost of capital so far below the market rate it "created incentives for the management to run the company into the ground to maximize short term returns and leave it, bloodless, to the next set of owners," EDHEC said.
USS hasn't received any payment from the company since it first invested in 2017. By contrast, a consortium led by Australian bank Macquarie took £1.26 billion out in dividends and interest as the debt escalated between 2008 and 2017. From 2017, payments to shareholders stopped.
"The regulator incentivized owners not to invest in the asset, and instead to extract cash as quickly as possible including by increasing leverage and other forms of financial engineering," EDHEC said. "This is exactly what happened."
Thames Water's "priority must be to deliver on a credible turnaround plan," regulator Ofwat said in a statement.
Thames has been engulfed by crisis over the past year amid a tougher regulatory framework under which Ofwat is demanding shareholders inject billions of pounds more equity to deal with its debt burden. They have already injected, or pledged, £1.25 billion to reinforce the balance sheet and Ofwat has said a further £2.5 billion will be needed between 2025 and 2030.
USS has pledged to stand by the business. It said in the 2023 accounts that "the company will continue to hold its investment for the foreseeable future."
"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," a USS spokesman said. "However, we have given our backing to Thames Water's latest business plan."
"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. That is why we were willing to commit additional funds to the business in March this year and have shown willingness to commit more in the future."
