Changing ownership of UK water companies

Photo: construction underway at Peacehaven, Southern Water

The last few months has seen major changes to the ownership of the UK’s water companies. Cheung Kong Holdings has acquired Northumbrian Water, the Canadian investment fund Capstone has bough Bristol Water and this week came news that a Chinese wealth fund has acquired 8.7% of Thames Water. The later deal may have more to do with Santander selling its stake to raise cash due to the Euro Crisis and the withdrawal by investors of funds from European banks.

However its clear that the UK water sector remains very attractive to investors. This is further underlined by the successful bond issues by several water companies like the £250 million bond issue at 4.875% by Severn Trent. Its not surprising the water sector is attractive, given its totally secure cash flow – its customers wont stop using water! The regulated structure means that their income for the next few years is certain. Better still water prices are linked to the retail price index so are currently increasing by over 5% a year – not many businesses have that luxury.

The 64 000 dollar question is has the regulator got the balance right between a fair charge to customers and an adequate return to reward investors? The appetite to buy UK water companies implies not.

The start of a new year is traditionally a time for looking forward. Although much of the news has been about the Euro crisis and current financial problems of most of the world’s major economies. The blog believes it is also a time to be optimistic.

Yes major change is happening, perhaps most importantly there is a huge demographic change underway as the average age in the G20 countries gets older. The post war baby boomers are now reaching their 60’s and this will have a profound impact on demand patterns.

                                                                     Graph copyright International eChem

 29% of the rich Western population are now in the New Old generation of 55+ years. Yet just a century ago, Western life expectancy was only 46 years. It was still only 66 years in 1950. Today, these 272 million people can expect to live until they are 80.

This change in age profile to many more people being ‘retired’ rather than being in their 20’s to 40’s, having families and buying new houses and cars will have a huge impact on demand. People in their 60’s plus don’t need new cars or houses, they have very different demands.

The blog written by my ex ICI Watercare colleague Paul Hodges gives a lot more detail on the changing population demographics and why this will create a New Normal. His blog is well worth reading www.icis.com/blogs/chemicals-and-the-economy/

There is a big paradigm shift underway. But any change like this brings opportunities especially for those first to realise what is happening.

The blog wishes you a successful and happy New Year.

Wessex Water success

Wessex Water is continuing it’s remarkably good performance. They continues to be the best performing water company. Wessex Water have  topped Ofwat’s new Service Incentive Mechanism (SIM) for all areas of customer service as well as the provision of water and sewerage services. On customer satisfaction 98% of customers who contacted them rated their service as good or very good.

Wessex Water have just released their interim financial results and have continued to perform very strongly out performing their capital and operational allowances by more than any other water company. Wessex Water have also won two environmental performance awards for their work on catchment management and work by GENco on waste reduction and recycling. Wessex Water were the best performing water company in the recently published Carbon Reduction Commitment league tables.

Wessex Water have for most of the time since privatisation been at the top of the league tables. They are very unusual in having had the same Chief Executive, Colin Skellett,  since 1988 and several other of their Directors are  almost as long serving. It’s the view of this blog that this can not be a coincidence and perhaps something other companies should consider emulating. 

Water White Paper

Today sees the release of the long awaited Water White Paper. It starts to address what needs to be done to increase the resilience of our water system and tackle the combined effects of climate change and a rising population.

Its main proposal is to move towards catchment management to tackle the issue of diffuse pollution and abstraction licensing. It recognises that only a quarter of our rivers and lakes are fully functioning ecosystems.

While the general tenor is to be welcomed its disappointing that the White Paper is more about talk than action. The legislation needed to tackle abstraction licensing is not planned to be introduced until the next Parliament. Given the current issues with water supply can we really wait that long?

Does showering really save water?

An interesting study by Unilever that monitored Brit’s showering habits has found that having a shower uses almost as much water as a bath – with power showers using more. It seems that on average we spend 8 minutes at a time in a shower. This would cost the average family of four £416 a year (90% is the energy cost) and 90 000 litres of water.

This may not seem revolutionary but behind the figures are two important learning points. Firstly and surprisingly it seems the Unilver work is the first significant scientific study of showering. The scientists used a shower sensor devise to monitor 2600 showers taken by 100 families. All too often people assume they know what is best, this report challenges the assumption that showering will save significant amounts of water. 

Secondly it highlights the importance of thinking holistically. The saving does not come from reducing water consumption – it makes very little financial difference - but from the huge cost of heating the hot water. Perhaps if people want to save money the advice should be to have a bracing cold shower!

Unilever has also published its research into how to bring about behaviour change. The ‘Five Levers for Change’ Unilver identified are:

             

    Make it understood. Sometimes people don’t know about a behaviour and why they   should do it. This Lever raises awareness and encourages acceptance.

              

        Make it easy. People are likely to take action if it’s easy, but not if it requires extra effort.  This Lever establishes convenience and confidence.

              

        Make it desirable. The new behaviour needs to fit with how people like to think of themselves, and how they like others to think of them.  This Lever is about self and society. 

              

        Make it rewarding. New behaviours need to articulate the tangible benefits that people care about.  This Lever demonstrates the proof and payoff. 

Make it a habit.  Once consumers have changed, it is important to create a strategy to help hold the behaviour in place over time. This Lever is about reinforcing and reminding.  

Water low priority in corporate board rooms

Water management trials behind climate change on the board room agenda, despite significant near term risk and opportunities. The Carbon Disclosure Project (CDP) Water global report has found that 57% of the publically listed organisations that took part in the survey report board level oversight of water issues compared with 94% of global 500 companies that address climate change. 

Over half (59%) of companies surveyed report exposure to water-related risks such as flooding, scarcity, and reputational damage. The majority of these risks are near term: 64% of risks in direct operations and 66% of risks in the supply chain are identified as occurring between now and 2016. Illustrating the urgency of water risk, more than one-third of responding companies (38%) have already experienced water-related business impacts, such as disruption to operations from severe weather events (e.g., flooding) and water shortages.

Underscoring the opportunities associated with effective water management, 63% of respondents say that water presents commercial opportunities, most of which (79%) are near term. The most commonly identified opportunities are associated with cost reductions from increased water efficiency, revenue from new water-related products or services, and improved brand value.

While its encouraging to see that so many companies recognize that water is both an opportunity as well as a risk, we need to see a lot more companies really taking water issues seriously. 

Changing owners in UK water sector

It has been all change in the ownership of Northumbrian Water with UK Water acquiring the company for £2.41 billion. UK Water is a consortium of Hong Kong companies ultimately owned by Li Ka-shing, supposedly Hong Kong’s richest man. Cambridge Water has been sold to South Staffordshire Water and a Canadian Infrastructure fund Capstone Infrastructure has bought a 70% stake in Bristol Water with Agbar, the Suez Environment subsidiary retaining 30%.

It is not hard to see why the water sector is proving so attractive. It offers secure long term investment that is almost risk free and an attractive rate of return of somewhere between 6 and 13%. With the 5 year regulatory cycle investors can be certain of the return until the next periodic review and even then with so much investment linked to the existing asset base and of course with zero risk of demand for water reducing investors can be confident that similar returns will continue. There is not many investments in the current climate that are so safe.

The water industry does need investors given the need to finance the massive capital programmes. But the question has to be asked that if investors continue to be willing to value companies at well above the regulated asset value is the returns set by Ofwat too generous and are customers getting a poor deal?