(Bloomberg) -- Thames Water’s second-largest shareholder and one of Britain’s biggest investors in key infrastructure warned that it will reconsider its future funding for other regulated assets following losses at the beleaguered utility.
UK-based Universities Superannuation Scheme plans to change its approach to investing in private markets as a result of its experience with Thames, said Simon Pilcher, chief executive of the pension fund’s investment arm.
“Our experience with Thames Water will influence our future approach to investing both in economically regulated assets and more broadly,” he wrote in an annual report. “Despite our very best efforts, it is clear this has not been a successful investment.”
USS is also invested in Heathrow Airport Holdings Ltd., NATS Holdings Ltd., broadband provider G.Network and renewable energy. It bought a stake in Thames Water in 2017 from Macquarie and then increase its share again in 2021. It has never made any money on the investment, according to the fund, which manages pensions for active and retired university employees.
Thames Water, which provides drinking water and sewage services to a quarter of England, including London, has been in crisis for over a year after rising interest rates put pressure on the indebted company. The problems came to a head at the end of March, when shareholders including USS turned their back on the company, declaring its business plan “uninvestible.”
Kate Barker, chair of the trustee board for USS, said its extensive engagement with the regulator Ofwat and Thames Water management had “not borne fruit” and was “a great disappointment and frustration,” according to the report.
Thames has asked to pay investors a 5.7% return on equity needed for infrastructure investments over the next five years’ regulatory period. But Ofwat indicated it would allow only 4.8%. The regulator has also said that as a poorly performing company, Thames cannot pay dividends to its parent company to service debt.
Thames’s biggest shareholder, Ontario Municipal Employees Retirement System, earlier this year wrote down its £1 billion stake in the water company, and Queensland Investment Corporation confirmed it had done the same for its stake of about 5% this week. Thames’s parent company, Kemble Water Holdings, defaulted on its debt in early April.
USS declined to say it had written off its stake. Pilcher said “the value of our holding at 31 March 2024 was minimal in the context of the defined benefit part of the scheme” with £74.8 billion worth of assets under management.
“We deeply regret having arrived at such a position,” he added.
In the latest sign that Thames is inching toward special administration, it was downgraded to junk status by Moody’s Ratings on Wednesday. That means it has breached the terms of its license which requires it to have at least two investment grade ratings.
--With assistance from Philip Aldrick.
(Updates fourth paragraph with other companies USS has invested in.)
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