Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: If you think about the consequences that we've all been
Speaker 2: living with, it's such a unique story, isn't it. You've
Speaker 2: got on the one hand, it's about a company in distress,
Speaker 2: so far, so normal, but it's also about you know,
Speaker 2: we use its water. You've got the boat race the
Speaker 2: other day where the rowers were all some of them
Speaker 2: were real. They were told not to go in the water,
Speaker 2: which is very, very unusual. When I send my kids
Speaker 2: into the sea, I do wonder if they'll get sick.
Speaker 2: And I remember being in government and saying to someone
Speaker 2: speed now two years ago, you know, would you swim
Speaker 2: and they said, I'd be very careful.
Speaker 1: This is the thing.
Speaker 3: You've kind of got the public side of it, which
Speaker 3: is sewage and leaks and people literally having sewage spills
Speaker 3: in their kitchens and being told it's because they put
Speaker 3: nappies in the toilet and they don't even have children.
Speaker 1: And then you've got this.
Speaker 3: Very very complicated financial structures and extremely complicated regulation because
Speaker 3: these are privatized monopolies.
Speaker 2: From Bloomberg Studios in the heart of the square mile.
Speaker 4: This is in the city.
Speaker 2: Our weekly look at the conversations motivating powerbrokers, policymakers and
Speaker 2: financiers the world over. I'm alegra Stratton. Francine and Dave
Speaker 2: are both away on holiday this week. I'm not bitter,
Speaker 2: so I've instead asked my fellow associate editor and Readout
Speaker 2: author Alva Ray to make her podcast debut this morning. Alva,
Speaker 2: you were writing yesterday, what did you do in the
Speaker 2: read app?
Speaker 4: I did?
Speaker 5: Rachel Reeves in Lightintinhart. She's going to fund some of
Speaker 5: her manifesto pledges after Jeremy Hunt nicked there.
Speaker 1: In Nondo holicy.
Speaker 4: What's the answer.
Speaker 5: I Cracking down on tax dodgers is the plan. Whether
Speaker 5: that will actually work is less certain, but they're hoping
Speaker 5: that they can squeeze an extra five billion by doing that.
Speaker 2: But both of us have written about Thames Water. I
Speaker 2: think I did it last week. I can't remember all.
Speaker 4: Me sinto one your pieces too.
Speaker 2: So we're joined by Jess Shankleman, who is Pillenberg's guru
Speaker 2: on all things Thames Water. Jess, you were given the
Speaker 2: beat about six months ago when he came back from
Speaker 2: Matt leave, won't you Yes?
Speaker 3: I came back from Matt leave and was told yeah,
Speaker 3: you know you're going to be covering Thames water now.
Speaker 3: But prior to that, I was doing a lot on climate,
Speaker 3: which I still do when I have a second And
Speaker 3: it was kind of a weird moment because I came
Speaker 3: back around August September and the crisis from last year.
Speaker 3: There's Thames water crisis last year where they almost went
Speaker 3: into special administration was subsiding and I just thought it
Speaker 3: was really quiet, and Rachel Morrison, my boss, was saying, no,
Speaker 3: it's going to blow up again.
Speaker 1: It's going to blowup again.
Speaker 4: You didn't think it was a big assignment.
Speaker 3: I was kind of like, Oh, I'm writing about rest
Speaker 3: what's going on with these reservoirs in Oxfordshire?
Speaker 1: And they kept talking about debt and gearing and I
Speaker 1: was like, oh God, I don't know all this stuffed too.
Speaker 3: And then I so sort of spent the last six
Speaker 3: months going to conferences and trying to embed myself in
Speaker 3: the water industry, which is very small and.
Speaker 1: There's a lot of revolving doors.
Speaker 3: Everyone's worked everywhere and just trying to work out what
Speaker 3: is going to happen with Thames. At the end of November,
Speaker 3: my colleague Phil Oldrich wrote story saying Kemball, which is
Speaker 3: a parent company of Thames, might run out of.
Speaker 1: Run out of money, not run out of water and loan.
Speaker 2: Behold they have So that was the key moment November
Speaker 2: four months ago.
Speaker 1: Well it was there.
Speaker 3: It was the end of their annual report which came late,
Speaker 3: and the auditors warned that there was a possibility they
Speaker 3: might run out of money in April, which is where
Speaker 3: we are.
Speaker 2: So yes, give us, give us the sort of most
Speaker 2: relevant aspects of the story.
Speaker 1: Yeah, so, I mean I just to go back a
Speaker 1: couple of days. That is what happened.
Speaker 3: At the end of last week. Kemball effectively defaulted on
Speaker 3: its loans. So Kemball is the parent company of Thames Water.
Speaker 3: That doesn't mean that Thames is defaulted on its loans.
Speaker 3: Thames is still operating. We reported that Kemble's owners, that
Speaker 3: nine different shareholders of this company, which is basically an
Speaker 3: investment vehicle, begged Steve Barkley, the Environment Secretary, please step
Speaker 3: in and help with this process with the regulator. They're
Speaker 3: not giving us what we want. And he came back
Speaker 3: and said nope, this is not for me to deal with.
Speaker 1: So we.
Speaker 3: Yeah, well, the government do not want to step in
Speaker 3: and have this on their hands. It's a massive depth
Speaker 3: pole that they have to deal with, if so.
Speaker 5: And that's what our government team has really been reporting
Speaker 5: for the past few weeks that Richie Sunak just you know,
Speaker 5: wants to wash his hands off this. But until you
Speaker 5: reported that, you know, Steve Barkley formally rejected this plea
Speaker 5: for help. I suppose it was just vibes that we
Speaker 5: were reporting.
Speaker 3: Yes, so the government has updated it's special administration legislation
Speaker 3: for water companies, so they did that at the beginning
Speaker 3: of this year, and basically having done that, they hope
Speaker 3: to be able to sit back and just let this
Speaker 3: play out. If terms was brought into special administration, it
Speaker 3: kind of creates like a repackage off the shelf model
Speaker 3: that you can then break them up and sell them
Speaker 3: if you need to, whereas prior to that, it was
Speaker 3: all this kind of old nineteen nineties legislation that made
Speaker 3: everything very complicated.
Speaker 1: So they've just got their ducks in a row.
Speaker 4: But just let's just look at that for a second.
Speaker 2: You said the government sort wants to let this play out,
Speaker 2: but what does that actually mean.
Speaker 3: At the moment, we are in the middle of a
Speaker 3: crucial point in the regulation process.
Speaker 1: Off what is the regulator.
Speaker 3: Every five years, every single water company has to say,
Speaker 3: this is our five year business plan of what we're
Speaker 3: going to do, the investments we're going to make. So
Speaker 3: at the moment they are all trying to work out
Speaker 3: what they're going to do from twenty twenty five to
Speaker 3: twenty thirty. They put the business plans in at the
Speaker 3: end of last year, and off What spends a year
Speaker 3: reviewing them. So this is really crucial at the moment
Speaker 3: because they're in negotiations and that's what's been happening between
Speaker 3: Thames and off What and it's become very politicized because
Speaker 3: spalled back to COVID people started swimming in rivers, they
Speaker 3: realized that they were swimming in poo. Water companies would
Speaker 3: which is shocking. Yeah, water companies were told you have
Speaker 3: to make massive investments in stopping sewage bills and stopping leaks,
Speaker 3: and water companies were saying, but up until now we've
Speaker 3: been told that the main focus has been to keep
Speaker 3: bills low, which is still a focus, but you also
Speaker 3: have to now fix all the sewage bills and all
Speaker 3: the leaks, and Thames is appalling for sewage bills and
Speaker 3: it has the worst leaks of all the water companies.
Speaker 3: The other thing that was happening was there was concerns
Speaker 3: about dividends and off what started cracking down on dividends,
Speaker 3: and Thames's whole business model is basically built on paying
Speaker 3: dividends to its parent company, and off what has stopped that,
Speaker 3: which means that its parent company now has no source
Speaker 3: of income.
Speaker 1: So if we just go back to how this is going.
Speaker 3: To play out, all of these negotiations that have been
Speaker 3: happening between Thames and off Whats so far have been
Speaker 3: behind the scenes, and what's been announced is based on
Speaker 3: conversations that we don't really know the details of. But
Speaker 3: in June, off what has to come out with its
Speaker 3: draft determinations on all the business plans. That's going to
Speaker 3: be the next sort of big moment for Thames. They
Speaker 3: have said, we're going to go back to our parent
Speaker 3: company at this stage and ask again, please you give
Speaker 3: us the money we need. So they need about three
Speaker 3: billion out to the end of twenty thirty. But as
Speaker 3: it stands with Kemble defaulting on its loans, that's very unlikely.
Speaker 3: So then Chris West and the CEO said, well, we
Speaker 3: might go to the market, So what does that mean
Speaker 3: an IPO?
Speaker 1: Which will you.
Speaker 3: Know, A lot of people have laughed at the idea
Speaker 3: of that. Terms would probably do very badly in an IPO.
Speaker 3: But listed water companies perform much much better than all
Speaker 3: the other water companies that are run by private equity.
Speaker 3: There are so much more transparency and accountability, and you
Speaker 3: have kind of easier access to to shareholders and investors
Speaker 3: if you did it that way.
Speaker 1: So that is a possible, That's.
Speaker 4: Exactly I think that would be a good.
Speaker 1: I really don't know. I was talking to dta Helm
Speaker 1: on Friday.
Speaker 4: About an energy expert.
Speaker 1: Yeah, and he thinks he thinks it's a good idea.
Speaker 3: But other people I spoke to they just laughed in
Speaker 3: my face when I suggested it and said no, you know,
Speaker 3: like when when was the last time I was trying
Speaker 3: to think back to it. When was the last time
Speaker 3: we had a big sort of IPO, Like was it
Speaker 3: Royal Mail Company?
Speaker 4: And yeah, Alva, how does that play out?
Speaker 5: But people will always need water, which is why people
Speaker 5: have sort of pension funds invest in it in the
Speaker 5: first place. So maybe in the longer terme jest. Do
Speaker 5: you think that that that could work?
Speaker 3: Yeah, I wonder whether it could be quite bumpy to start,
Speaker 3: but as you say, that's that's the whole reason that
Speaker 3: people invested in water in the first place. And Tames
Speaker 3: Water is too big to fail at the moment, it
Speaker 3: could get.
Speaker 1: Broken up, and I think, I think it's I think it's.
Speaker 3: Possible, and times have said yeah, all options are on
Speaker 3: the table at the moment.
Speaker 5: Thames wanted to put up bills by forty percent. This
Speaker 5: is sort of where the latest crisis has come from.
Speaker 5: They had a five year plan to put up bills
Speaker 5: by forty percent to pay off some of the s debt,
Speaker 5: to invest in infrastructure. Can you take us through what
Speaker 5: has happened since and quite how dramatic things are at
Speaker 5: this point.
Speaker 3: Tames has been asking off what for leeway on a
Speaker 3: couple of things, and from my reporting speaking to people
Speaker 3: on all sides of everything, there's a couple of things
Speaker 3: that Thames want and I think it's very natural for
Speaker 3: in this like extremely complicated environment for people to focus
Speaker 3: on bills. All the water companies want to want to
Speaker 3: put up bills, and Thames is looking to put up
Speaker 3: bills by forty percent by the end of twenty thirty.
Speaker 3: I think probably what's more significant is there's something called
Speaker 3: the whack. So over the last six months I've been
Speaker 3: doing a lot.
Speaker 4: Of learning about the whack.
Speaker 3: Tell us about the wack jargon wa WA double C
Speaker 3: the weighted cost of capital, and that's kind of really
Speaker 3: crucial to all these negotiations. So that says like, this
Speaker 3: is how much it's going to cost Thames Water to
Speaker 3: dig up the road outside of Bloomberg HQ to fix
Speaker 3: that leaky pipe, and Thames is saying, look, you know,
Speaker 3: it's going to cost us one hundred pounds a day.
Speaker 1: Obviously a lot more than that.
Speaker 3: And of what is saying, well, you know, up in
Speaker 3: you know, another part of the country, it's costing seven
Speaker 3: only seventy pounds a day, so I don't see why
Speaker 3: it should cost you anymore. So Tames are saying, you know,
Speaker 3: effectively it's London waiting, right, it costs more to do
Speaker 3: stuff in London because there's skyscrapers and a lot of people.
Speaker 3: And off, what's not bending on that off, what's argument
Speaker 3: is this company has been financially engineered over the years.
Speaker 3: It's failing on sewage it's failing on leakage, why should
Speaker 3: we give this company any leeway and off what is
Speaker 3: fighting for its life as well of what needs to
Speaker 3: prove that it's cracking down.
Speaker 5: So just what are the other options? We've sort of
Speaker 5: hinted at it, But yeah, how likely is it that
Speaker 5: the government steps in? And what are the other options
Speaker 5: on the table?
Speaker 3: So yeah, So as I think we we sort of
Speaker 3: reference earlier, the government wants this to play out. So
Speaker 3: I think this government does not want to step in.
Speaker 3: I mean, we've got an election in a couple of
Speaker 3: weeks time, mayoral elections in London and obviously Terms is
Speaker 3: the supplier of London water. Then we've got a general
Speaker 3: election coming up, and they do not want to make
Speaker 3: this an election about water. Anyone who takes ownership of Thames,
Speaker 3: I mean, as far as I know, no one would
Speaker 3: buy Thames as it stands. But if say you decide
Speaker 3: to buy it for a pound, you would then have
Speaker 3: to invest three billion pounds in fixing chronic leak, sewage spills,
Speaker 3: terrible customer service, everything. So the government does not want
Speaker 3: to spend three billion pounds on sorting this out, particularly
Speaker 3: if you think about why they got into this mess.
Speaker 3: Is it really the responsibility of the taxpayer to fund
Speaker 3: that investment that should have been happening over the last
Speaker 3: decade or so?
Speaker 2: Alva, what's the Labor perspective on all of this? Clearly
Speaker 2: recesting that Prime Minister and Steve Barkley are wanting the
Speaker 2: company to sort this out, but this is a central
Speaker 2: issue for a possible next government if Labor win the
Speaker 2: next election.
Speaker 5: Yeah, I think so. I mean, especially because it looks
Speaker 5: as though the government are hoping that they will be
Speaker 5: able to wash their hands off this and ess as
Speaker 5: reported that Thames should have enough money to last until
Speaker 5: next year so they could just kick the cant on
Speaker 5: the road. Labor would have to potentially step in and
Speaker 5: bail terms out essentially, which they desperately don't want to do.
Speaker 5: I think they're not saying terribly much about it, even
Speaker 5: off the record. I think that they are probably actually
Speaker 5: more aligned with the government on this than they would
Speaker 5: like to admit. If there are potential avenues for the
Speaker 5: government to never get involved, I think Labor would favor that,
Speaker 5: which is true.
Speaker 3: I was talking to an investor who was saying, they're
Speaker 3: wondering the size of Labour's majority, because if they have
Speaker 3: a very large majority, Kirstama will be able to avoid
Speaker 3: special administration. But if they have a smaller majority, and
Speaker 3: you know, John McDonnell and some of the people on
Speaker 3: the hard left have been calling for nationalization, it would
Speaker 3: be harder for him to avoid that.
Speaker 5: Jess you reported last week that OFF what has to
Speaker 5: make a decision about whether to find terms for some
Speaker 5: of this mismanagement, and my read of that was that
Speaker 5: that could be decisive and whether the government does need
Speaker 5: to step in sooner rather than later. What's happening with
Speaker 5: that fine?
Speaker 4: Would it change things?
Speaker 2: Yeah?
Speaker 3: I think that has broader implications for the whole industry really,
Speaker 3: because the way that a lot of these businesses are
Speaker 3: structured is you've got the utility, which is regulated and
Speaker 3: ring fenced, paying dividends to the unregulated parent company to
Speaker 3: service the parent company's debt. And that is of what
Speaker 3: is not happy with OFF. What it's saying, particularly if
Speaker 3: you're a poorly performing company, you should not be paying
Speaker 3: dividends to service someone else's debt. All the money should
Speaker 3: be going to fixing sewage spills and leaks. And Thames
Speaker 3: was basically just the test case because that rule was
Speaker 3: introduced around this time last year in Thames was the
Speaker 3: first one to announce that it had paid the dividends.
Speaker 3: My question is whether this could have a domino effect
Speaker 3: and when other companies start getting blocked from paying these
Speaker 3: dividends as well, their parent companies would also say that
Speaker 3: this structure is no longer sustainable.
Speaker 2: Unless we're for all these big infrastructure upgrades that you
Speaker 2: can see across lots of different policy areas, private money
Speaker 2: will be needed. And is there a concern that the
Speaker 2: regulator may have gone too far the other way? And
Speaker 2: for private money around the world looking at the UK
Speaker 2: and thinking do I invest in its utilities?
Speaker 4: Is that going to become too risky?
Speaker 2: Yeah?
Speaker 1: I mean I understand.
Speaker 3: I've just been told from conversations with investors that the
Speaker 3: Treasury is quite worried about the signal this sends to
Speaker 3: investors globally. And I think the question is is Tames
Speaker 3: a bad apple. Is it just a very very badly
Speaker 3: run utility, or is this the UK saying we've got
Speaker 3: very complicated and difficult regulation and you shouldn't come here.
Speaker 1: I think it's probably the former. I think Thames has
Speaker 1: just been.
Speaker 3: A right old mess and off what is in a
Speaker 3: very very difficult situation politically. The investors have been very
Speaker 3: critical off what but if you push them they kind
Speaker 3: of admit that, like what else can they do? I
Speaker 3: think the noise around it makes this sector completely uninvestable
Speaker 3: at the moment, and that is something that really has
Speaker 3: to be tackled because there's so much negativity in the
Speaker 3: media and around the politics of it that no one
Speaker 3: in their right mind just want to go near it.
Speaker 5: So we haven't formally heard from off what it makes
Speaker 5: of Thames's planned but we've had reporting that it doesn't
Speaker 5: support the current plans, and then shareholders have said that
Speaker 5: Thames is uninvestable they refuse to put the money in,
Speaker 5: and then last week the parent company defaulted on its debt.
Speaker 5: So it seems like this crisis has ratcheted up quite
Speaker 5: a few notches, yes, and.
Speaker 1: Quite dramatically in the last two weeks.
Speaker 5: Yeah, So what happens in the immediate term? What should
Speaker 5: we look for next?
Speaker 3: Who's going to blink? I think is it a question?
Speaker 3: Is this a game of brinkmanship? And I think that's
Speaker 3: what a lot of people think. A lot of the
Speaker 3: newspapers are reporting that the parent company has said, like,
Speaker 3: we're not even waiting for off What's an official determination.
Speaker 3: We've had enough conversations with off What to know that
Speaker 3: this is not going to work. This plan is uninvestable,
Speaker 3: and therefore you deal with it.
Speaker 1: We're done, so you know.
Speaker 3: One option could be that one of the larger shareholders,
Speaker 3: say Omer's, which is the Canadian or USS, says Okay,
Speaker 3: we've put all this money into Thames already, we still
Speaker 3: haven't got a penny out. Why don't we just gamble again.
Speaker 3: We'll put the three billion in and we'll wipe out
Speaker 3: all the other investors and we'll take this on and
Speaker 3: eventually Thames will get turned around and we will make money.
Speaker 3: I don't know if that is going to happen, because
Speaker 3: having had conversations with people around this, it seems quite terminal,
Speaker 3: and the fact that Kemball has defaulted on its loans
Speaker 3: suggests that they really have thrown in the towel.
Speaker 5: Jess, thank you so much for coming in and explaining
Speaker 5: all of this to us. Is markey business, No worries anytime.
Speaker 5: I fear you'll be back quite soon.
Speaker 1: Oh no, it's true. For the next year.
Speaker 3: This is gonna This is a very slowly imploding company.
Speaker 1: I think it's.
Speaker 2: Thanks for listening to this week's In the City from Bloomberg.
Speaker 2: This episode was hosted by me alegra Stratton with Alva Ray,
Speaker 2: and it was produced by Somersadi additional editing by Blake
Speaker 2: Maple's Brendan Newnham is our executive producer. Sage Bauman is
Speaker 2: Head of Podcasts and special thanks to Jess Shankleman.
Speaker 4: Please subscribe, rate, and review wherever you listen to your podcasts.