Water Anyone?

On the cusp of the year of the water dragon, a Chinese sovereign fund has acquired 8.68% of Thames Water for a reported GBP500 million. The UK Chancellor, Mr Osbourne, said “This investment is good news for both the British and Chinese economies”.

We have been doing a fair amount of writing on Peak Water, resource depletion, and especially so in China.  As some of the smartest strategists in the world, it should come as no surprise that China sees value in water where others don’t.  

Maslow’s Heirachy of needs places water third after breathing and food.  Odd, it makes more sense to be second.  We can survive weeks without food, but only days without water.  And obviously only minutes without air. 

But if it is something that the Chinese government gets, it is the pending, if not present already, water shortage problem around the world.  So far China has been out buying agricultural land, commodities and now water (amongst other assets).

So I thought, okay, who is this Thames Water.  Wiki reports it is the third largest water and wastewater services company in the world, and supplies 2.6 Gigalitres of drinking water a day.  Thames Water is regulated under the Water Industry Act 1991 and is reputedly owned by Kemble Water Limited.

So far pretty simple.  From here on it becomes as obtuse as an orange.  The media reports that Abu Dhabi owns 9.9% of Kemble Water Holdings, the parent of the utility.  A completely different company and apparently purchased not that long ago. 

Then if we go to the web site, we learn that there it is much more complex.  

Thames Water was acquired by Kemble Water Limited on 1 December 2006 for GBP 8 billion. So far so consistent.  Kemble Water Limited is 100 per cent owned by Kemble Water Holdings Limited. The investors in Kemble Water Holdings Limited comprise Macquarie's European Infrastructure Funds 1 & 2 (MEIFs), certain other Macquarie-managed funds and various non-Macquarie investors made up largely of pension funds and other institutional investors from Europe, Canada and Australia (and Abu Dhabi above). The MEIFs are managed by Macquarie Infrastructure and Real Assets (Europe) Limited; a member of the Macquarie Group, a global investor and manager of infrastructure businesses.

Thames Water Utilities Ltd is known as “Thames Water” in case you are getting confused.

Then we had a look at the financial statements for the period ended September 2011 and we find that there are many other companies now leaching off poor old Thames Water.  

Suddenly we have Thames Water Utilities Holdings Limited, which is reported in the financial statements as the immediate parent company;  and then there is Kemble Water Finance Limited reported in the financial statements as an intermediate parent company.  Huh!!

Then there is this statement:  Kemble Water Holdings Limited is the ultimate and controlling party, the directors consider it to be so.  Don’t they know? 

Two paragraphs later, the reports states “The Directors do not consider there to be an ultimate parent or controlling party.”   

Then we have all the interparty transactions in just this set of financial accounts.  You can read it for yourself, but there were many.

But one thing worth noting is that the cash cow in the middle of this complex corporate structure, Thames Water, is paying more in dividends in the reporting period than it earned in net profit.  Profit was GBP146.6 million and dividends for the period were GBP155.1 million.  I thought this dividend payment policy went out with the GFC.  

But there is more.  Thames Water owes Thames Water Utilities Finance Limited.  GBP2,713.9 million in long term finance, and Thames Water Utilities Cayman Finance Limited GBP4,152.2 million also longer than 12 months.  Unneccesary corporate structuring usually delivers risk complexity; which in turn should demand higher returns.  A red flag!

So far I have counted seven entities related to Thames Water Utilities Limited;  excluding the investing companies.  Only an investment bank could find so many ways to leach profits out of this one utility.  That provides the second most crucial resource to much of England after oxygen.  

And yet the UK does not see water as a strategic asset?

Over in Australia they had these headline news on the same day.  “ASIO watch on Chinese money”.  For ASIO read FBI, MI5, etc.  It reports that “Documents released to The Saturday Age under freedom of information reveal that the country's two peak security and intelligence committees - the National Security Committee of Cabinet and the National Intelligence Co-ordination Committee - have recently focused their attention on foreign investment policy.”

They seem to have more departments and security services considering Chinese investment than you can poke a stick at.  The overall impression is that the Aussie government is keeping a keen eye on its resources.  Including water.  

Although the article does note that Australia has been the single biggest destination for Chinese money over the past six years, with investments totaling A$37 billion.  

A few years ago a Macquarie Group related entity attempted to buy the Snowy Mountain Hydro Electric Scheme and the Australian federal government jumped on that like a ton of bricks.  

Wiki reports its strategic importance (although this may no longer be accurate, it is close):

The Scheme is the largest renewable energy generator in mainland Australia and plays an important role in the operation of the national electricity market, generating approximately 67% of all renewable energy in the mainland National Electricity Market. The Snowy Scheme's primary function is as a water manager, however under the corporatised model must deliver dollar dividends to the three shareholder governments - the NSW, Commonwealth and Victorian Governments.

The Scheme also has a significant role in providing security of water flows to the Murray-Darling Basin. The Scheme provides approximately 2,100 gigalitres of water a year to the Basin, providing additional water for an irrigated agriculture industry worth about $5 bn per annum, representing more than 40% of the gross value of the nation's agricultural production.

As I have written before, it will be interesting to watch over the next few decades as government around the world, and companies, vie for the vanishing critical resources.  

For the UK, it is important to understand the character of a country’s elite .  At home the Elite are renowned for expecting the populace, all 1.3 billion of them, and those they deal with, to “Do as you are told”.  And they do.  Imbued with this expectation, they may expect the same elsewhere.  Nothing wrong with that, just the way it is.  UK, you’ve been warned.