May 2001
Water takes on a new liquidity
When Glas Cymru won approval from Ofwat to restructure Welsh Water, it introduced a new model for privatized UK utilities that does away with conventional shareholders. Glas will break new ground by financing its purchase entirely through a securitization. But despite the problems caused by shareholders taking cash out of the industry that the regulator wants to go to customers, many water companies argue that equity still has a role to play in their funding structure. Steve Metcalfe reports on a debate that could force the restructuring of an entire sector and might yield lessons for other utilities
How best to finance a water company? The question that has
kept finance directors and chief executives in this UK utilities
sector busy for much of the past two years is not about to be
solved, but at last some new answers are now being put forward.
It was a question somewhat fudged during UK privatization more
than 10 years ago.
Utilities providing an essential service were offloaded to
shareholders who hoped to reap healthy dividends, first through
cost-saving and redundancies at bloated former public monopolies.
That was easy for management teams incentivized by share options to
deliver. No-one seemed concerned that underleveraged utilities had
been given away on the cheap.
But when it became clear that water companies were not investing
retained earnings in improving their leaky infrastructure,
shareholders' good returns came under closer political scrutiny.
Glas Cymru, a non-profitmaking organization, has recently received
regulatory clearance to...
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