Water utilities successfully raise finance

Thames Water has this week raised another £300 million of debt on the bond market. This follows the £550 million it raised in mid-July. The issue attracted a lot of interest and was placed at 250 basis points over the 4% 2022 Gilt. Some had their allocations cut back. The aggregate proceeds are nearly 10% of Thames regulatory capital value and push the net debt to RCV value close to the 85% maximum stipulated by rating agencies.

United Utilities has also announced that Legal and General plc have upped their sharing holding to 4.23%. This news confirms that despite early fears over the “tough” Ofwat Final Determination actually the water sector remains highly attractive to investors. 

United Utilities warns of hosepipe bans

Photo source: Thames Water

With excellent timing Ofwat have just released an informative report summarising the position on water leakage reduction. Only last week United Utilities formally applied for a drought order and news of impending hosepipe bans is bound to raise the pressure to reduce water leakage.

Thames Water in conjunction with Swindon Council have launched an imaginative water saving scheme aimed at encouraging customers to reduce usage. They are even offering free visits for an engineer to survey customer’s homes and install water saving devices.  But will this really reduce water usage? So far just 41 people have signed up to the Swindon initiative hardly enough to transform usage.

When the payback period for installing a water butt can be measured in years, economic incentives alone, in the view of this blog wont change consumption. Many customers wont accept water saving ideas that impact on their personal freedom and consumer experience. Will the current strategy of installing more meters really reduce water usage to the best in class in Europe?

In some European countries the building regulations stipulate that new houses must collect and store rainwater for use in grey water applications. Measures like this have little or no impact on consumer’s experience and alongside work to encourage consumers to use water wisely could help to make a real difference.      

Veolia Water buys United Utilities principal non-regulated water interests

Photo source: Paul Hipwell

United Utilities has today announced it has agreed to sell its principal non-regulated water interests in the UK and Europe to Veolia Water plc for £174.2 million. In Europe Veolia is acquiring a 58% stake in Sofiyska Voda that supplies 1.3m residents of Sofia in Bulgaria with drinking water. It has also acquired stakes in the water supplier for Tallin in Estonia and the city of Biesko Biala in Poland.  This strengthens Veolia’s position in central Europe, a key market for the company.

In the UK, Veolia is acquiring from United stakes in three PFI contracts in Scotland (Tay, Moray and Highland wastewater treatment plants) as well as the contract to manage the building of the huge new Brighton wastewater plant for Southern Water. In addition it is buying UU’s stake in the 2010-15 capital delivery contract with Southern Water.

The move makes Veolia the leading player in the non-regulated water sector in the UK as well as strengthening its position in central Europe. It marks an important milestone for United Utilities as it nears the conclusion of its strategy to sell off non-core business. There are now only two water companies left with significant activity in the non regulated sector, Pennon and Severn Trent. 

United Utilities sells Australian operation

Photo: United Utilities

UU has today announced the sale of its Australian Division for £126m in cash and £30m in debt (A$225m). This is at the lower end of analyst’s expectations. The business was sold to a consortium led by a new entrant to the Australian market Mitsubishi Corp and Manila Water. UU only recently decreased its stake in Manila Water selling out to Ayala Corporation.

United Utilities has made clear its strategy to sell its outsourcing arm but this deal suggest the value of this business may be significantly lower that the company hoped. UU contract solutions has failed to secure contract renewals with Welsh Water and Scottish Water for AMP5 and while they have retained their contract with Southern Water it does have a smaller scope.

Veolia Environment has also hit problems with its long term operating contract model. Its share price has dropped from a peak of $62 in 2008 to $24 today. This does suggest that in these harsh economic times operating contracts are not as attractive as they once seemed. 

United Utilities bullish about prospects

In a recent investor presentation United Utilities Chief Executive Philip Green said that: “we are well prepared for this next price review period (April 2010-2015) and we are confident of delivering out performance.

This confidence stems from a number of actions United Utilities have undertaken:

•                  Low cost of their debt portfolio of 1.8% real compared to Ofwat’s assumption of 3.6%
•   A reduction in the number of employees in their regulatory business of 7%
•          Streamlining processes and rationalizing IT infrastructure
•   New supplier contracts on improved terms 

United Utilities have secured an increase in their capital expenditure plans of £400m in real terms compared to the previous AMP period 2005-10, with planned expenditure of £3.6bn. United Utilities are particularly pleased that their regulatory capital value (RCV) will grow by 12% in real terms by 2015.

This is worrying for two reasons. Firstly it shows the continuing importance water utilities place on high cost capital schemes – there is in effect an incentive on the water company to promote the highest capital cost scheme that they believe the regulator will support. This mitigates against finding schemes with the lowest whole life cost especially those with higher Opex. Its also worrying as this high level of growth in the RCV has to be paid for by customers – the question is how much longer will customers accept steadily increasing customer bills?