Kelda shares rise as it hives off debt-ridden Yorkshire Water

The Kelda Group is to hand over control of its subsidiary Yorkshire Water to the local community and then apply to run the new, mutually-owned company's operations. While some in the industry have hailed the decision as a workable compromise between privatisation and public ownership, consumer groups say Kelda is trying to divest itself of Yorkshire Water's debts while boosting its share price.

The move, which must be approved by Ofwat, would see the reversal of the company’s privatisation 11 years ago in favour of the creation of a non-profit making body owned by Yorkshire Water’s 4.3 million customers.

But consumer groups have their doubts. “Yorkshire Water have realised they are not going to make the profits they did in the past,” Peter Bowler at Water Watch told edie. “Therefore they’ve decided to keep the operational business, while the client takes the risk and hassle and they dress it up to look like they are doing the client a favour. While I think the principle of going back to a form of public ownership is sound, the fact that the fat cats are now trying to get rid of their companies makes their claims to commitment to public service ring extremely hollow.”

Kelda first announced it was launching a strategic review of its business in April, following the imposition of a 12% price cut by Ofwat. Kelda’s executive chairman John Napier said: “Following the last price determination, the board has found it necessary to consider relevant operations to deal with declining shareholder value and profits, coupled with the continuing need to finance a major long term capital investment programme. Our shareholders will benefit in the short term through the proposed return of cash, and in the long term by increased prospects for growth.”

The company estimates the demerger will lead to a reduction in overheads of around £10 million a year and could generate £2.4 billion, with the majority of the proceeds, between £1 billion to £1.3 billion, returned to shareholders after the deal goes through. Kelda is also selling its renewable energy and environmental services business and intends to expand its interests in the US.

The new business will be a community-owned corporation or Registered Community Asset Mutual (RCAM) which must negotiate to acquire the shares and assets of Yorkshire Water. Although a demerger was expected, mutualisation was a surprise because this is the first time an RCAM has been set up in the UK.

The new business will be run on lines similar to overseas models such as the French, where companies run the supply services but do not own them, and the US, where water company assets owned by local authorities tend to be debt financed.

The company will pay Kelda to run its water and sewerage services and will replace equity with a long term debt repayment plan. Proponents of the scheme argue that once investors have been repaid, any further profits should go back to the new business’ customers in the form of either improved services or cheaper bills.

This sort of arrangement is seen by many in the water industry as leading to better returns. Other UK water companies, such as Anglia and North West, have drawn up similar plans to emphasise their ability to provide water and wastewater services without the expense of carrying out environmental and infrastructure improvement work.

However, Ofwat views Kelda’s plans with suspicion, saying that mutually owned companies do not have to pay share dividends and could therefore be less accountable and be under less pressure to use capital efficiently. Kelda argue that the new company would still be subject to legislation requiring common carriage, and that the contract to run the new company’s business would be subject to regular competitive tender.

Bowler argues that Ofwat must not allow Kelda to transfer any debt to be transferred to the mutual company that was not wholly attributable to providing water and wastewater services, such as debts incurred to pay for shareholder dividends. He also warns that the presence of Kelda’s former director and the former director of Yorkshire Water on the board of the new company could have a direct effect on the outcome of any competitive tender. Bowler adds that the company’s assets should be priced no higher than the price paid at privatisation, as to do otherwise would make Yorkshire Water’s customers paying for assets already paid for in earlier water bills or by debts that Kelda is now divesting itself of.

Kelda’s shares rose to £4.00 from £3.33 following the announcement of the deal.

Action inspires action. Stay ahead of the curve with sustainability and energy newsletters from edie