Pension fund slashes value of its Thames Water stake by almost two-thirds

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One of the biggest investors in Thames Water has slashed the value of its stake by nearly two-thirds, intensifying doubts over the financial health of the UK’s largest water distributor.

The Universities Superannuation Scheme, a UK pension fund serving more than 500,000 university sector members, holds almost 20 per cent of Thames Water’s parent entity, Kemble Water, through an investment vehicle.

In the year to the end of March 2023, the USS’s stake in Kemble was valued at £364.4mn, compared with £955.8mn the year before, according to financial accounts published on December 30.

The 62 per cent writedown, revealed in the annual corporate filing for the USS’s Church Water Investment, comes as Thames Water is seeking to raise new equity of £2.5bn over the coming years from shareholders, including pension and sovereign wealth funds, in addition to £750mn already pledged but subject to conditions.

The writedown is also more than double the cut taken in percentage terms on Thames Water in 2022 by the utility’s biggest investor, the Ontario Municipal Employees Retirement System, one of Canada’s biggest public-sector pension funds.

Tim Whittaker, director at Edhecinfra, a research institute and data provider, said USS’s decision was “probably difficult but necessary”.

“Better late than never,” he said. “It’s obvious that the risks inherent in the business — but under-appreciated just a few years ago — are now being realised.”

Thames Water faces more than £1bn in debt repayments by the end of 2024, including a £190mn facility in Kemble Water Holdings that matures in April, according to the utility’s accounts published in November last year.

Last month, Thames Water appointed Chris Weston, the former head of power supplier Aggreko, as its chief executive, as the water company faced parliamentary scrutiny over its financial health and probes into its treatment of sewage. Ofwat, the regulator, is also investigating a £37.5mn dividend Thames Water paid in October and which it said ultimately reached its parent entity.

Shareholders have asked for restrictions on regulatory fines as one of the conditions for injecting new equity. Thames Water has asked Ofwat for a 40 per cent increase in customer bills by 2030 to underpin the promised £750mn investment.

The near-£600mn year-on-year writedown on USS’s stake is the biggest hit taken by the £75bn pension fund on its Thames Water holding, first made in 2017.

The USS said in a statement to the Financial Times that the challenges facing Thames Water were 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”.

“However, we have given our backing to Thames Water’s latest business plan,” it said.

The USS added: “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, in line with the long-term needs of the scheme. 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.”

In a note to the 2023 financial accounts, Church Water said its investment in Kemble was held at “fair value”, which was arrived at using a market approach that may include macroeconomic forecasts, “debt financing, growth and profitability prospects for the asset”.

In July, the FT reported that Omers, which owns a 31 per cent stake in Thames Water, valued its stake at £979mn at the end of 2021, before reducing the value to about £700mn in 2022.

Omers declined to comment on USS’s valuation cut.

Thames Water said in a statement that it was in a “solid financial position” and had “supportive shareholders” that have “agreed conditionally to provide a further £750mn in new equity”.

It added: “The Thames Water and Kemble boards approved our refocused turnaround plan at the end of 2023. 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.”