Thames Water vans are parked on a road as repair and maintenance work takes place, in London on April 3.Toby Melville/Reuters
The Ontario Municipal Employees Retirement System (OMERS) has written off its entire investment in troubled British utility Thames Water, walking away from a stake once valued at well over $1-billion.
Thames Water has been struggling under the weight of more than £18-billion ($31-billion) of debt that has become more expensive with high interest rates. In late March, its shareholders – of which OMERS is the largest – refused to inject more money into the beleaguered company, casting doubt on its viability.
Before Friday’s write-off, an OMERS subsidiary that holds a roughly one-fifth stake in Thames Water, OMERS Farmoor Singapore PTE Ltd., had filed annual financial statements that show it marked down the value of its assets from £700-million ($1.2-billion) at the end of 2022 to £321-million ($461-million) at the end of last year.
The financial filing also refers to the impasse that shareholders reached with Thames Water and its regulator, Britain’s Water Services Regulation Authority, or Ofwat. The “subsequent financial effect will be a full write down of the investment” and an outstanding loan, the filing says.
As of Dec. 31, 2021, OMERS had valued the part of its stake held through its Singapore subsidiary at £990-million ($1.7-billion).
On Thursday, OMERS also withdrew its representative from Thames Waters’s board of directors when Michael McNicholas, a managing director at OMERS Infrastructure, stepped down.
Shareholders in Thames Water “concluded that the UK regulator, Ofwat, was not prepared to provide the necessary regulatory support for Thames Water to have an investable business plan. Consequently, no shareholders provided further funding to Thames Water and the value of OMERS Thames Water investment has now been written off,” said James Thompson, a spokesperson for OMERS Infrastructure, in an e-mailed statement Friday.
OMERS is one of Canada’s largest pension fund managers, overseeing $129-billion of assets with investments in Canada, the United States, Europe and Asia.
“This diversification, scale and strength of our investments ensure that we can protect our members from these kinds of challenges as they arise,” Mr. Thompson said.
Thames Water serves 16 million customers, mostly in and around London, and investors value such utilities for the steady returns they typically provide. But as problems piled up at Thames, the company’s relationship with its regulator deteriorated.
More than a year of negotiations failed to produce an agreement for shareholders to put up further support. Since then, investors in Thames Water have been bracing for further writedowns, and by the time talks stalled, the estimated value of the utility had already plunged. Faced with a choice between putting more money into the flailing utility or cutting its losses, OMERS has chosen to walk away.
The write-off deals a blow to OMERS’s $28-billion infrastructure portfolio, which has otherwise largely performed well. The unit earned a 5.5-per-cent return in 2023 – dragged down by unrealized losses on a few assets in energy, utilities and transportation – and has returned an average of 10.7 per cent annually over the past decade.
OMERS owns about 32 per cent of Thames Water’s parent company, Kemble Water Finance Ltd., through multiple subsidiaries. But OMERS has partners in its investment, which makes its direct exposure to losses somewhat lower. The pension fund made its initial investment in Thames Water in 2017, in tandem with the infrastructure-investing arm of the Kuwait Investment Authority (KIA). OMERS then boosted its stake to current levels in 2018.
Another major Canadian pension fund, British Columbia Investment Management Corp. (BCI), owns nearly 9 per cent. BCI manages $233-billion in assets.
A spokesperson for BCI could not immediately be reached for comment.
Thames Water was privatized in 1989 and its debt has been piling up as the company borrowed to pay for upgrades to its water and sewage infrastructure. The utility had been looking for a lifeline from nine of its investors that would have provided more than £3-billion ($5.15-billion) in funding over the next five years, with an initial £500-million that was due March 31. But after the investors balked, the likelihood that the British government could have to step in has increased.
At the time, OMERS’s global head of infrastructure, Michael Hill, said that “shareholders can no longer invest money into a business where it has become clear that we will never get it back.”
Mr. Hill had also stressed that writedowns on the OMERS stake will not affect its ability to pay pensions to members.