National Grid prefers to invest profits in USA

Underinvestment in the UK was blamed for recent blackouts …

“National Grid has ploughed a record of almost £2bn into its booming US-based business this year as increasing political pressure raises questions over the multinational’s future in the UK.

The energy network provider spent nearly £1.6bn growing its regulated US business over the first six months of the year, and also invested £200m into its US-based renewables company Geronimo.

Over the same period, National Grid spent less than £650m running the gas and electricity networks in the UK, where policymakers are squeezing energy company profits and proposals to renationalise utilities have won public support.

The London-listed company has built its US presence in recent years amid growing calls for UK utilities to be renationalised. It distributes gas and electricity to businesses and homes in New York, Rhode Island and Massachusetts.

John Pettigrew, National Grid’s chief executive, said the record spending was in response to strong demand from north-eastern US states to transform their energy system to run on renewables. There was also healthy investor appetite for infrastructure projects, he said.

The US business helped drive National Grid’s underlying operating profits to £1.3bn for the first half of the year. In the UK, profits from its electricity networks rose by 5% to £583m, while profits from its gas grid business fell by more than a quarter to £66m. In the US, underlying operating profits rose 16% from the year before to £525m. …”

https://www.theguardian.com/business/2019/nov/14/national-grid-us-uk-business-renationalise-utilities?CMP=Share_iOSApp_Other

“Freezing home forces disabled Cranbrook mum to be separated from her young twins”

Is this the district heating? Not a good ad for Eon or Cranbrook …

“A young disabled mum with 15-month-old twins has told how the dream of finally moving into a permanent home in Cranbrook – after being rehoused four times since they were born – has turned into a nightmare.

Amber Owen-Jones has not seen her children for five days because they are having to live with her mother in Somerset as their new ‘freezing’ two-bedroom housing association property has no hot water or heating.

Last Friday, the 19-year-old and her partner Michael Korth, 21, picked up the keys to their new home and say that when they realised not all the utility services were working, a LiveWest employee notified energy provider Eon by emailing them their tenancy agreement to get a new account set up. …

However, they say they were told someone won’t be coming until today, October 30, and no time was confirmed.

Amber said: “Eon were refusing to turn our hot water and heating on. The house is absolutely freezing.

“My children even had blue feet as we have no carpets. Eon kept saying they will sort it out on Wednesday, but it’s not acceptable. …”

https://www.devonlive.com/news/devon-news/freezing-home-forces-disabled-cranbrook-3478804

How company debt (and greed and tax avoidance) will sink us all

“Corporate addition to high debt threatens to destabilise the world economy. Not my words – those of the International Monetary Fund.

A recent report by the IMF says that “in a material economic slowdown scenario, half as severe as the global financial crisis, corporate debt-at-risk could rise to $19 trillion —or nearly 40 percent of total corporate debt in major economies—above [2008] crisis levels.”

In other words, in an economic slowdown, many firms will be unable to cover even their interest expenses with their earnings. Countries most at risk are US, China, Japan, Germany, Britain, France, Italy and Spain.

One study estimated that in 2018 UK s FTSE 100 companies alone had debt of £406bn.

Sinking in debt

Low interest rates have persuaded companies to pile-up debt in the belief that they will be able to use it to maximise shareholder returns. The key to this is tax relief on interest payments.

Ordinary folk don’t get tax relief on interest payments for mortgages or anything else because successive governments argued that such reliefs distort markets and encourage irresponsible behaviour.

However, corporations get tax relief on all interest payments. Currently for every £100 of interest payment, companies get tax relief of 19%, the prevailing rate of corporation tax, which reduces the net cost to £81. The tax subsidy enables companies to report higher profits.

Companies do not necessarily use debt to finance investment in productive assets. The UK languishes near the bottom of the major advanced economies league table for investment in productive assets and also lags in research and development expenditure.

British companies appease stock markets by paying almost the highest proportion of their earnings as dividends. BHS famously borrowed £1 billion to pay a dividend of £1.3bn. Carillion used its debt to finance executive pay and dividends. Thomas Cook had at least £1.7bn of debt but that did not stop lavish executive pay and bonuses.

Fatal effects

Corporate debt facilitates profiteering and tax avoidance. Water companies have long used ‘intragroup debt‘ to dodge taxes. Typically, they borrow money from an affiliate in a low/no tax jurisdiction. The UK-based company pays interest which qualifies for tax relief and reduces the UK tax liability.

Many a tax haven either does not levy corporation tax or exempts foreign profits from its tax regime. As a result, the affiliate receives the interest payment tax free.

It is important to note that the company is effectively paying interest to another member of the group and no cash leaves the group. The inclusion of interest payments in the paying company’s cost base can also enable it to push up charges to customers, especially if has monopoly rights on supply of goods and services.

Thames Water is an interesting example here. From 2006 to 2017, it was owned by Macquarie Bank and operated through a labyrinth of companies, with some registered in Caymans.

During the period, Thames’ debt increased from £2.4bn to £10bn, mostly from tax haven affiliates, and interest payments swelled the charges for customers. Macquarie and its investors made returns of between 15.5% and 19% a year.

For the period 2007 to 2015, the company’s accounts show that it paid £3.186bn in interest to other entities in the group alone. Tax relief on interest payments reduced UK corporate tax liability. For the years 2007-2016, Thames Water paid about £100,000 in corporation tax.

Private equity entities use debt to secure control of companies and engage in asset-stripping. A good example is the demise of Bernard Mathews, a poultry company.

In 2013, Rutland Partners acquired the company and loaded it with debt, which carried an interest rate of 20%. This debt was secured which meant that in the event of bankruptcy Rutland and its backers would be paid before unsecured creditors.

In 2016, Bernard Matthews’ directors, appointed by Rutland, decided that the business was no longer viable and sought to sell it. However, they only sold the assets of the company which realised enough to pay secured creditors, Rutland and banks.

The big losers were unsecured creditors, which included employee pension scheme, HMRC and suppliers. The purchaser of the assets told the House of Commons Work and Pensions Committee that it offered to buy the whole company, including its liabilities, but the offer was declined by Rutland because by dumping liabilities it collected a higher amount.

What needs to change

There is some recognition that corporate addiction to debt poses a threat to the economy. Following recommendations by the Organisation for Economic Co-operation and Development, the UK has placed some restrictions on the tax relief for interest payments, but that is not enough.

An independent enforcer of company law is needed to ensure that companies maintain adequate capital. Companies need workers on boards to ensure that directors do not squander corporate resources on unwarranted dividends and executive pay.

The insolvency laws need to be reformed to ensure that secured creditors can’t walk away with almost all of the proceeds from the sale of assets and dump liabilities.

And finally, tax relief on debt needs to be abolished altogether.”

https://leftfootforward.org/2019/10/prem-sikka-how-companies-use-debt-to-line-their-pockets/

Water companies enraged that OFWAT is putting consumers before investors

“Top investors in the water industry have complained to the Treasury that the regulator Ofwat is being politicised and warned of a flood of appeals against its financial demands.

International investors that control suppliers including Anglian, Yorkshire, Affinity, South East and South Staffs led a delegation this month ahead of a crunch ruling on prices by Ofwat, due in December. They are reeling from the toughest draft settlement from the regulator in years and fearful of Labour’s pledge to renationalise the sector at a big discount to market value.

After years of taking huge dividends from water companies and piling debt onto them, while paying minimal corporation tax and overseeing scandals such as sewage spills and water leaks, utility investors have seen the industry and political environment turn toxic.

Ofwat, chaired by former Anglian Water boss Jonson Cox, stunned the sector in July when it rejected the spending plans of all but three companies and sent the other 14 back to the drawing board, demanding more efficiency, faster paydown of debt and better customer service. It will publish its final ruling on their 2020-25 spending plans in December.

The meeting on October 14 is believed to have included blue-chip investors such as German insurer Allianz, Singapore sovereign wealth fund GIC, Deutsche Bank’s wealth division and Australia’s IFM Investors. Among the issues raised was Ofwat’s independence and the dangers of it reacting to political pressure.

Cox has been on a crusade to clean up the sector. In an interview last year, Cox told The Sunday Times: “This industry still doesn’t accept that customers should be at the heart of this business. We are unwinding one of the last bits of the pre-crash bonanza: buying an asset and gearing it up.”

Investors also asked senior mandarins whether the Competition and Markets Authority had the resources to deal with simultaneous appeals against Ofwat’s financial stipulations. At least five suppliers are believed to considering appeals.

The funds called on the Treasury to assess the financial resilience of the sector, after companies including Thames and Northumbrian complained that Ofwat’s demands were “unfinanceable”.

Global investors have ploughed billions of pounds into former state-owned companies since the privatisation wave of the 1980s and 1990s, yet are increasingly reassessing whether the UK is still an attractive place to park their cash.

Ultra-low interest rates and the need for returns inflated asset values and led to a bidding war for infrastructure companies. However, the appetite for water companies has cooled over the past two years. The Sunday Times revealed in April that Labour planned to renationalise the industry at a big discount to market value, making deductions for “asset-stripping since privatisation”.

That and Ofwat’s clampdown have spooked local authority pension funds, which have belatedly begun pouring cash into infrastructure. GLIL, which invests the pensions of council staff, was among the attendees at the Treasury meeting.

Last month, Alain Carrier, European boss of the CAN$400bn (£239bn) Canada Pension Plan Investment Board, which owns a stake in Anglian, said: “It’s difficult for the regulator under the current political climate not to be seen to be very tough. The independence of the regulator is under some pressure.”

Ofwat said: “Our decision-making is independent from government and based on delivering the very best for customers. Investors have always made clear they value the independence of the regulatory regime.”

Source: Sunday Times (pay wall)

How fat cats get fatter

“The regulator has allowed energy network companies to make bigger than expected profits at the expense of household bills, according to its own state of the market report.

Ofgem admitted the companies that run Britain’s energy pipes and wires had earned double-digit returns in the last year despite its efforts to keep a lid on energy bills.

The regulator oversees the business plans of regional gas and electricity networks to keep a rein on how much each firms can spend on their infrastructure, and how much they can claim back through energy bills.

It said that with hindsight it had set the rate of return too high, and that some companies had managed to spend less than planned, to rake in higher profits.

The uncomfortable evaluation has emerged following Ofgem’s decision to appoint its head of networks as its new chief executive. Jonathan Brearley will replace Dermot Nolan when he steps down in February next year.

It said: “The overall costs to consumers of the transmission and distribution networks have turned out to be higher than they needed to be.”

The admission is likely to anger critics of the companies, including UK Power Networks and National Grid, who have warned that networks are hiking up household energy bills while paying bumper shareholder payouts to foreign investors. …”

https://www.theguardian.com/business/2019/oct/03/energy-network-firms-allowed-to-make-bigger-than-expected-profits-ofgem-admits?CMP=Share_iOSApp_Other

“EDF warns Hinkley nuclear plant could cost extra £2.9 billion, see more delays”

Note to our Local Enterprise Partnership:
1. Don’t whatever you do go for a day at the races and bet any money – your track record advises against it.
2. You have (and always have had) developers on your Board. Surely one of you could have tipped off EDF about “challenging ground conditions”!

“The British project cost hike also comes just days after the country saw an auction for offshore wind projects clear at a record low, raising questions of the cost competitiveness of new nuclear.

EDF said Hinkley Point C was estimated to cost 21.5-22.5 billion pounds ($26.8-$28 billion), up 1.9-2.9 billion pounds from its latest estimate. …

Crooks said the cost increase was related to challenging ground conditions at the site. …”

https://uk.reuters.com/article/uk-britain-nuclear-hinkley-edf/edf-warns-hinkley-nuclear-plant-could-cost-extra-2-9-billion-see-more-delays-idUKKBN1WA0K1?

“Rivers used as ‘open sewers’, says WWF charity”

As a district well-provided with rivers and estuaries, a worrying issue:

Targets for 75% of rivers to be healthy by 2027 are “very unlikely” to be met in England, a charity has warned.

The World Wide Fund for Nature (WWF) says rivers are “used as open sewers”.
The Environment Agency predicts 75% of rivers in England and along the Scottish and Welsh borders will meet EU expectations by 2027, compared with just 14% now.

It is planning an autumn consultation on “challenges and choices” faced in cleaning up water. The agency said it would review the target based on “what can realistically be achieved”.

Sewage discharging into rivers has been one of the most common reasons for ecological health tests being failed, while water companies in England have been told their efforts to protect the environment were “unacceptable”. …”

https://www.bbc.co.uk/news/uk-england-49131405