Kelda is forced to abandon plan to refinance Yorkshire Water assets

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The Independent Online

Kelda, the owner of Yorkshire Water, has abandoned a second restructuring plan that would have involved selling the regulated water assets to a group of bondholders and returning at least £1bn to shareholders.

The plan, developed in secret over the past three months by the Kelda chairman, John Napier, and a small team of executives, was ditched after it became clear there was insufficient appetite in the bond markets.

Mr Napier's first attempt at restructuring Yorkshire Water by selling the business to its customers and returning the proceeds to shareholders was blocked by the water regulator Ofwat 18 months ago. Ofwat decided the plan was too risky for consumers and would not deliver sufficient cost savings because Kelda would have continued to manage the network.

The second restructuring attempt differed in that Yorkshire Water would have been sold to bondholders, leaving Kelda with just its US water business Aquarion and a share in a UK waste business.

The plan looked at by Mr Napier and his team initially involved selling 90 per cent of Yorkshire Water to bond investors, enabling Kelda shareholders to retain a 10 per cent minority stake. However, as the plan developed, it was decided that 100 per cent of Yorkshire Water should be disposed of, at or close to its regulatory asset value of £1.4bn. Shareholders would have received between 250p and 350p a share.

Mr Napier is understood to have sounded out Prudential, the UK's biggest holder of water bonds, about the proposals. Hugh Jones, the head of Prudential's UK investments, is an old friend of Mr Napier and was a contemporary of his at Cambridge. The restructuring plan is understood to have been abandoned earlier this month after Mr Napier decided that the numbers would not stack up. Soundings taken among bond investors also indicated there was unlikely to be a rush of interest.

During an analysts' visit to the company's Leeds headquarters earlier this week, Mr Napier stressed that the emphasis would now be on driving down Yorkshire Water's costs to meet the tough new price controls imposed by Ofwat two years ago.

The failure of the Kelda plan means that, so far, only Welsh Water has been successfully restructured. Welsh Water was bought by Glas Cymru, a company limited by guarantee which is funded entirely with debt and chaired by the former Treasury mandarin Lord Burns.

ScottishPower, the owner of Southern Water, is in the process of refinancing the business with £1.9bn of debt and AWG is working on a similar debt-financing plan with Anglian Water, which will result in a cash payout to shareholders of between £400m and £600m.

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