Bid farewell to the Caymans

Water companies are making steady progress in winding up their Cayman Islands subsidiaries as they try to improve transparency and rebuild trust with their customers. Katey Pigden reports.

Southern Water has recently confirmed it is working towards closing its subsidiary finance company in the Cayman Islands by the end of this year. It hopes the move will make its financial structure and its 100 per cent UK tax status “more transparent and easier to understand”.

Southern set up its Cayman Islands company for debt raising purposes and insists it has never “offshored its tax obligations”. It has made the decision to wind up the subsidiary because it contributes to “misconceptions” about its business practices.

The company has been working towards the move since August 2017 and its board reached an agreement to close the offshore company at the end of last year.

When Utility Week met Ian McAulay, chief executive of Southern Water, at its headquarters in Worthing earlier this month, he said Southern isn’t just “thinking” about this – “we are going to do it”.

Although he would not give a date for completion, McAulay said “reasonably good progress” is being made. “We’re targeting being finished by the end of the year. I think it’s good the shareholders are saying this.

“There are no tax benefits with the Cayman Islands company, but it has become toxic and there’s an ability for things like that to become damaging in terms of trust.

“I think for some companies there have been unusual arrangements, but for water companies it was a function of how they were set up in the first place. But it doesn’t matter; it has become something that we need to resolve.”

He added: “This is the point of reflection now – we cannot continue to do what we have always done.”

Dizzying complexity

Other companies adopting the same ethos include Yorkshire Water, Thames Water and Anglian Water. All four were accused by environment secretary Michael Gove at Water UK’s annual City Conference in London on 1 March of making “particularly keen use of sophisticated financial engineering”, having set up “multilayered corporate structures of dizzying complexity involving multiple subsidiaries, some based offshore”.

The following month, Ofwat chairman Jonson Cox set out a programme of reform to bring the water sector “back in balance” and rebuild public trust. He wrote to Gove on 9 April in response to the secretary of state’s signal of a crackdown on executive pay and offshore financial arrangements to address the “concerning” behaviour of water companies.

The regulator plans to reform company licences; address concerns over executive pay; increase transparency around dividends and profits; ensure companies are financially resilient; and encourage companies to share with customers financial outperformance from additional gearing.

In an annex supplied with the letter, Cox said: “There has been public criticism about the bewildering complexity of securitised companies’ corporate holding structures. We welcome responsible capital from around the world, but we see no reason for overly complicated structures which have created the perception of undue focus on financial engineering.”

A week later (16 April), several chief executives from water companies met Gove ahead of his response to Cox on 18 April. The roundtable included McAulay, Richard Flint from Yorkshire Water, Steve Robertson from Thames Water and Peter Simpson from Anglian Water.

Yorkshire Water announced its intention to close its offshore financial arrangements in October 2017. It has since indicated it expects to receive the final regulatory clearances to remove its Cayman companies imminently. The company is aiming to bring the bonds that were held within its Cayman Islands subsidiaries back on shore to UK firms by early summer.

Liz Barber, group director of finance, regulation and markets, tells Utility Week: “When we announced the plan to remove our Cayman companies, it was pleasing to see that our colleagues in other companies with similar structures decided to follow suit. We also said at the time that removing the companies was far from straightforward and would take some time, with a range of legal and regulatory approvals. Nonetheless, we’ve moved as quickly as we could.”

She adds: “We’ll be reporting on the final stages of this process when we publish our report and accounts in July.”

Corporate structure

Thames Water followed Yorkshire’s lead and in November announced the appointment of former SSE chief executive, Ian Marchant, as independent chairman. He has been tasked with leading a review of the company’s corporate structure and governance. The company said the review would be conducted with the intention of closing its Cayman Islands subsidiaries to ensure “best possible transparency” for customers and stakeholders.

Since then Thames has remained quiet about its proposed timeframe, but a spokesperson tells Utility Week: “We are making good progress and are due to complete the process in 2018.”

Meanwhile, Anglian Water is forging ahead, having announced removal plans in March as part of a wider transparency overhaul. At the end of April, it confirmed it had requested permission from the Cayman Islands High Court to proceed with the removal of its Cayman Islands subsidiary.

Anglian’s chief executive Simpson says he is “delighted” with the speed with which the company has managed to implement its initiatives.

A spokesperson for the Department for Environment, Food and Rural Affairs tells Utility Week: “The government expects water companies to work as diligently for customers and the environment as for their investors. We welcome the action that the four water companies have taken to close their Cayman Island subsidiaries.”

Progress is being made by all four companies, but as McAulay points out: “If we could unwind it tomorrow, everybody would have done it.

“It’s about making sure we all get it right. It’s interesting to think what will be next once we [the sector] fix this. I’m not really sure where it ends. But for us, we’ve made our decision: it ends in the Caymans, simple as that.”