In one year alone, Thames paid a £656m dividend – pushing the group into the red.
Dividends are post-profit, right?
It’t literally impossible for a dividend to cause a loss – to go into the red.
In one year alone, Thames paid a £656m dividend – pushing the group into the red.
Dividends are post-profit, right?
It’t literally impossible for a dividend to cause a loss – to go into the red.
“Thames Water’s shareholders have sucked out billions of pounds from the company over the past two decades and piled the utility with huge debts.
Australian bank Macquarie and a string of offshore pension funds bought Thames in 2006 and controlled the business as a consortium for a decade.
Over that period, they took out about £2.7bn in dividends using a complex financial structure ultimately underpinned by money paid into Thames Water by bill payers.
In one year alone, Thames paid a £656m dividend – pushing the group into the red.
During the most prolific periods, shareholders sucked out another £1.3bn between 2010 and 2014.
In the final year of ownership, the Macquarie-led consortium shared in a further £157m windfall as debts rose four-fold to £10bn from £2.3bn.”
Not sure what the ‘complex financial structure’ is but it seems to have involved paying out dividends while also increasing debt fairly dramatically. It’s probably legal but it does look slight suspect to my eyes.
The other beef on this is that the cash should have been reinvested to repair and expand infrastructure.
I fear that you are pushing at a locked door here, Tim. Macquarie screwed Thames Water over right royally and Ofwat let them.
Dividends are from retained profits. So you could pay out more divis in year 2 than Yr 2 profits, provided you had some retained yr1 profits. Which might look like going into the red to an uneducated man.
In any event the consensus narrative is evil capitalist barkeeps. Cut off anything that doesn’t fit.
Never mind that Thames has invested several more bn in infrastructure than their total debt. Or that Ofwat are the ones simultaneously slowing down capital investment while hugely ramping up the fines for leaks. Or whatever the benchmark Scottish Water is up to. ( State owned, similar bills, no profits, leaks like a seive but significantly does not monitor so no stats available). Or welsh water (6 of the top 10 sewage spill regions).
About that debt.
When privatised Thames was debt free.
It needed to invest heavily in infrastructure. Funds for that can come from shareholders or borrowing or the govt ( tee hee).
If you’ve got security assets, lots of them, and low current borrowing then debt is cheaper than shareholders funds. Sensible play is therefore borrow. Even with current borrowing debt to asset ratio is probably less than 25% which should be very comfortable for most businesses.
Notwithstanding the complex business structure and a bit of early milking, this has gone wrong for 4 reasons:
A new public outrage at sewage spills, which are declining over the years;
Ofwat ramping up spill fines;
Significant % rate increases on borrowing;
Ofwat restricting price increases;
Ofwat therefore restricting capital investment plans.
Excluding the (probably) maneagable debt cost increase this is a legislative vice that Thames find themselves in. The regulator is driving up their costs through fines while refusing to allow them to mitigate the fines through investment, or allowing a revenue increase to cover those costs.
Now why didn’t the complainers give the dividend as a percentage return on investment? What value of assets supports the divi? I suspect the numbers in the article are presented in such a way as to make this look a lot worse than it is.
This is more related to yesterday’s threads.
But for all you Germanists out there, I tripped over an article from Bavarian Radio about how the gas market has been screwed by government.
Although there has been large scale privatisation, many providers of gas are still local authorities.
It has become uneconomic for them to continue providing gas, because most were forced to buy at the top of the market and now thanks to LNG imports the price has fallen and they are lodin money. Furthermore the Red Green govt has announced 10 years to exit the gas market and switch everything to “renewable” electricity. People, not just in villages but also some cities are being forced to switch to wood pellet burners or heat pumps, while the local authorities try to build their centralised heating infrastructure.
A cold, dark future awaits the good Burgers of Germany.
https://www.br.de/nachrichten/wirtschaft/gasnetze-stilllegen-warum-kommunen-sich-zurueckziehen,U8EFN0F
Round numbers: incomes in London about 30% higher than North East. Water bills about 20% higher.
For a business that depends a lot on labour and land, then the water price should rise to reflect – sorry Londoners, your water costs should be in line with the regional difference in local beer and restaurant costs. Waitrose Metro and not Asda.
I wonder what fraction of the Ofwat panel live in Thames catchment.
@Ottokring: in the lovely wee museum in Dumfries there is, or was, a painting of the burghers riding out to attack Kirkcudbright in the late 17th century. This was odd; Dumfries was a well-ordered, peaceful, Calvinist little town.
The Little Ice Age weather had been so bad that the time was referred to as “King William’s ill years”. There was dearth and famine. So order broke down. Is that what the red/greens want?
I’ve long entertained the theory that the socialists are deliberately trying to fuck everything up, because comfortable proles won’t rise up and bring on the revolution.
The alternative theory is that they are all utter incompetents at all times. They can’t all be, can they?
BiW: As Glenn Reynolds of Instapundit fame is wont to say, embrace the healing power of “and”. It could be both.
“There was dearth and famine. So order broke down. Is that what the red/greens want?”
Yes, because in their particular Religion there is no way the poor oppressed masses will revolt against them, since they are the Saviours and Leading Lights of ….etc.
They are, of course, completely deluded in that respect.
How does water privatisation work? The water companies are geographic monopolies and the people paying water bills are not customers they are a harvest. Is it like the train companies where an outfit is granted a license to run a service and are eventually run off if they don’t perform? Is this what Ofwat is really up to; kicking a bad performer into touch? Who, ultimately, is the customer in this arrangement?
Whilst acknowledging efficiency benefits in private vs public, it strikes me that this version of water privatisation is designed to fail. If the people paying the bills are unable to say, “fuck you, I’m going with someone else” or “I’m just not paying for a shit service”, then they are always going to get shafted in the end. I don’t know if Thames’s owners actually were vampiring the situation – but why the hell wouldn’t they?
“Whilst acknowledging efficiency benefits in private vs public, it strikes me that this version of water privatisation is designed to fail. If the people paying the bills are unable to say, “fuck you, I’m going with someone else” or “I’m just not paying for a shit service”,”
The business water market is indeed a proper market, in theory at least. As a business I’m not supplied by Thames, or South West, or Severn Trent etc, I’m supplied by one of the hived off business water suppliers. And I can swap suppliers if I don’t like my current one. The problem comes with the ‘I’m not paying for sh*t service’ bit – ALL the business water suppliers are sh*t. They are all run by a bunch of money grabbing tossers and as such they behave all behave like c*nts to their customers, the little ones at least. I expect if you’re Mr Tesco you get dancing girls and cocaine on tap when you ask about moving your account, but Joe Small Business gets told ‘Have this and like it’. The one I’m with (Castle Water) have invented the concept of ‘estimated bills in advance’. They not only want to estimate how much water I’m going to use, they want me to pay for it in advance. As I said money grabbing c*nts.
I would happily commit genocide on those responsible for running Castle Water, sell their families into slavery, raze their houses to the ground and sow the ground with salt, I hate them that much. And judging by the comments on my farmers forum, thats being kind to them.
Another word for “dividend” is “paying the people who’ve lent you money for the hire of that money they’ve lent you”.
“I’ve given Thames 20 grand of my money, what, you say I shouldn’t get anything in return for that? Ok, I’ll have it back, thank you very much.”
jgh
Indeed, but the complaint is ( whether true or not ) that the bulk of this money was going to Macquarie as the majority shareholder. As such the Macquarie consortium should have been reinvesting this money instead of paying it to itself.
Nothing illegal, but doesn’t strike me as a sound technique to build a business long term.
@jgh – “Another word for “dividend” is “paying the people who’ve lent you money for the hire of that money they’ve lent you”.”
No. I’m afraid it isn’t. Dividends are where you (all shareholders) own a company and decide to slice off a bit and take it as money. You are merely giving yourselves what you already own. This should be of absolutely no significance to any outsiders. The usual bleating about it being a substitute for investment is nonsense. If no dividend had been paid, the company might have spent the money on anything or merely left it in a bank account (Google’s parent, Alphabet, last year held $134 billion in cash, which was about $10 per share, but didn’t pay any dividend). Equally, having distributed a dividend, there is nothing preventing the company investing by borrowing money or even raising money from shareholders (though that would be stupid as the dividends would be taxed on the way out, so it would make more sense for the company to retain the money).
From the various reports I have not figured out what has happened. My best guess is that a previous shareholder managed to contrive a situation where money was borrowed and then paid out as a dividend, which is in principle ok, but should reduce the value of the company and therefore share price. Somehow the reduction in value was not apparent to the new buyers, who have therefore paid signifiantly more than they should have. Therefore, when the company needs to spend more money, the potential revenue is not sufficient to justify paying more in – generally if a company cannot raise a loan to pay for capital works, then shareholders should be very wary of buying more shares to provide the money as return on shares must be higher than return on a loan to justify the risk of losing your money is the company does badly.
But Google only soends the money on new computers or on buying a anothercompany.
They aren’t fixing the sewers in Balham.
It’s worse. The regulator sets the price that can be chargefd. With reference to hte capital base (a return on that). The regulator has not been allowing prices rises, therefore not allowing capital going in.
This is – at least in part – Ofwat price fixing problem
“The regulator sets the price that can be chargefd. With reference to hte capital base (a return on that). The regulator has not been allowing prices rises, therefore not allowing capital going in.”
That doesn’t follow. If the way it works is TW is allowed a certain return on capital, then presumably if they introduce more capital they are allowed a return on that? If the regulator is not allowing price rises regardless of the amount of capital introduced then they are cutting the overall return on capital, not maintaining it.
Or is the problem that a lot of the spending required is repairs and renewals (replacing old equipment or fixing leaks etc) rather than a new pipeline or reservoir, so the actual capital base does not increase much despite heavy expenditure?
Ofwat’s not allowing the increase in capital spending because it would mean those price rises.
But is the regulator preventing price increases because it sees the money going out in dividends rather than being invested? According to Charles above (I have no idea) there seems to have been some (non water related) financial shenanigans that mean the company is much less suited to running the service than it was previously. If this was your local baker putting his prices up to pay off his gambling debts you’d buy your bread elsewhere. Thames “customers” have no such luxury; their only protection against being harvested to pay for shareholder crime / lack of diligence is the regulator.
My guess is that the water biz was making a decent operating profit, and was debt free, which made it an attractive target for the PE types., who spend a shed load on buying it. Then as the years roll by and spending on improving water quality and repairs to assets etc are required you just keep taking on more debt to fund that work, while still paying out the operating profits as dividends, instead of reinvesting them in the business. The cost of borrowing was low as rates have been on the floor since 2008/9, so taking on the debt didn’t affect operating profits too much. Rinse and repeat until you have a massive debt pile, and interest rates start to go up, at which point the whole house of cards collapses.
What I don’t know is why the whole thing can’t be put into bankruptcy and prepacked and sold to a new owner without the debts attached. Let the PE and money men take the hit, not the customers.