OMERS, BCI risk reputation hit from Thames Water investments

Article content

A troubled water utility company in the United Kingdom that counts two of Canada’s biggest public pensions as large shareholders is facing regulatory scrutiny and fines for sewage leaks and could require a financial bailout.

Article content

The Ontario Municipal Employees Retirement System (OMERS) and British Columbia Investment Management Corporation (BCI) own 31.8 per cent and and 8.7 per cent of Thames Water, respectively. Analysts at DBRS Morningstar said in a July 5 report that OMERS and BCI are expected to weather the storm with minimal financial damage given their size, diversification and long-term performance — even if Thames Water were to collapse — but there is reputational risk for the Canadian pensions, which could affect future investment opportunities.

Article content

Thames Water is the largest water utility in the UK, serving about a quarter of the population. It is heavily indebted and has faced financial difficulties in the face of rising interest rates. Investors have been called on to pony up £1 billion, after injecting £500 million in March, to upgrade infrastructure and help manage the £14-billion debt load. However, the UK government is now understood to be considering a range of options to cut off the collapse of Thames Water, including the possibility of placing it into a special administration regime that could take the company into temporary public ownership and result in financial losses to the current shareholders, according to the DBRS report.

Article content

Article content

One of Thames Water’s large shareholders, the £90-billion Universities Superannuation Scheme, which has a 20 per cent stake in the utility, has publicly pledged support for Thames Water. It will face questions about its stake in Thames Water from the UK’s pension regulator, as early as this week, according to a July 5 report from the Financial Times, citing people familiar with the situation.

Both Canadian pensions declined to comment on their role in what is happening with Thames Water, referring instead to a June 28 statement from Thames Water Utilities Finance PLC, which said the utility “is continuing to work constructively with its shareholders in relation to the further equity funding is expected to be required to support Thames Water’s turnaround and investment plans.”

Article content

That added a statement that the utility’s regulator, Ofwat, is being kept “fully informed on the progress of the company’s turnaround and engagement with shareholders” and that Thames Water maintained a strong liquidity position including £4.4 billion of cash and committed funding as at 31 March 2023 .

OMERS has been an investor in Thames Water since 2017, following a divestiture by Australia’s Macquarie Group, which later faced criticism for ratcheting up the debt while taking profits from the utility. BCI has been an investor in Thames Water since 2006.

Keith Ambachtsheer, a Canadian pension expert and director emeritus of International Center for Pension Management, said the Thames Water case pokes a hole in the frequent characterization of infrastructure investing as a suitable investment for long-term pension plans and an easy way to generate inflation- linked returns.

Article content

“Thames Water offers a counter to that view: infrastructure investing can also be challenging and risky,” Ambachtsheer said in an email to the Financial Post on July 5.

The growing scandal over utilities has raised questions in the UK about the strategy of privatizing critical utilities.

In one of the latest knocks for Thames Water, the embattled utility was fined £3.3 million on July 4 at Lewes Crown Court after a faulty storm pump that went unnoticed spilled sewage into rivers near Gatwick Airport.

On June 27, Sarah Bentley, the CEO of Thames Water, stepped down abruptly. Her exit came amid reports that the utility’s leakage rate was at a five-year high, according to a report in the Guardian. Before she stepped down, Bentley forfeited her bonuses but it appeared to be too little to dispel growing controversy.

Article content

The problems at Thames Water have also spilled into ESG funds, as the utility has issued around US$3 billion of green bonds since 2022.

According to a Bloomberg News report on July 4, more than 200 ESG funds bought into those bond issues and are left assessing what impact any environmental, social and governance deficiencies at the utility will have on their holdings.

“Investing in water sounds ‘green’. Investing in a water utility with a long list of environmental problems and apparently no credible plan to resolve them is not,” said Ambachtsheer. “Where was the ‘due diligence’?”

The pensions invested in Thames Water may also face questions over the utility’s environmental impact.

• Email: [email protected] | Twitter: BatPost

Article content