TheChek News Flow

Thames Water embarks on three-year turnaround plan

Financial health of UK’s largest water company has come under increased scrutiny

Thames Water has embarked on a new three-year turnaround plan and acknowledged its “performance was not where it needed to be”, as the UK’s biggest water company reported a drop in first-half profits.

The utility, which provides water and sewerage services to about 15mn households in London and surrounding areas, said on Tuesday that pre-tax profits fell 54 per cent to £246mn in the six months to September 30. Revenues climbed 12 per cent to £1.2bn in the period.

“Turning around Thames will take time. We simply cannot do everything that our customers and stakeholders wish to see at a pace and for a price that everyone would like,” interim co-chief executives Cathryn Ross and Alastair Cochran said in a statement.

Over the past year, Thames Water has faced larger financing costs on its £14.7bn debt pile as well as bigger labour and energy bills. The pressures have sparked fears over the financial health of the UK’s largest privatised water utility.

The concerns were deepened after the Financial Times last week revealed that Thames Water had presented a loan from its shareholders to its parent company as fresh equity. The company has said it was accurate to describe the £500mn loan as equity.

The group said on Tuesday that it had total liquidity of £3.5bn at the end of September. Its shareholders include sovereign wealth, private equity and pension funds.

Thames Water was rocked in June after Sarah Bentley, the chief executive, abruptly quit after a boardroom row.

The group is seeking approval from Ofwat to be allowed to increase customer bills by about 40 per cent — before inflation — by 2030.

Rating agency cites growing risks to growth and a property sector crisis

Rating agency Moody’s Investors Service cut its outlook on China’s sovereign credit rating to negative on Tuesday, citing growing risks of persistently lower midterm economic growth and the overhang from a crisis in the property sector.

Moody’s said there was rising evidence that the government and state companies would provide financial support to weak regions, “posing broad downside risks to China’s fiscal, economic and institutional strength”.

The agency’s cut in outlook came as China struggles to address multiple economic challenges this year, with Beijing under pressure to tackle a slowdown in the country’s cash-strapped property sector, a debt crisis in weaker provinces and a slowdown in the broader economy.

Investors are also keen to know China’s target for gross domestic product growth next year, with policymakers expected to discuss this at an annual central economic work conference this month.

Also up for discussion will be fiscal support for the economy in 2024.

Moody’s affirmed its A1 rating for the country. It downgraded China’s credit rating from Aa3 to A1 in 2017, citing concerns that efforts to support growth would spur rising debt in the economy.

Immediately after Moody’s statement, China’s finance ministry said it was “disappointed about the decision”.

“China’s macroeconomy continues to recover and high-quality development is steadily advancing,” the ministry said. “It is unnecessary for Moody’s to worry about China’s economic growth prospects and fiscal sustainability.”

The ministry also said China’s “long-term positive fundamentals have not changed, and it will remain an important engine for global economic growth in the future”.

The impact of the property sector slowdown on local and central government fund budgets was “controllable and structural”, it said.

Moody’s expects China’s GDP growth to be 4 per cent in 2024 and 2025. The finance ministry said it expected the country’s economic growth to reach 5 per cent in 2023.

China’s benchmark Shanghai Composite index lost 1.67 per cent on Tuesday, with the index trading below the psychologically important level of 3,000 points.

Airbus might need state backing for new aircraft programme to replace A320, chief says

Guillaume Faury comments could test 2021 agreement that resolved long trade dispute between Europe and US

The head of Airbus has said the group “might need some support” from European governments for a new, multibillion-dollar commercial aircraft programme as it gears up for a successor to its best-selling A320 family of jets.

Chief executive Guillaume Faury indicated that Airbus could ask for taxpayer backing — an increasingly politicised issue as governments try to help industry decarbonise — to launch a single-aisle aircraft and a shorter-range, hydrogen-powered plane.

Faury said the European aerospace and defence group had the financial firepower to fund the development of both programmes thanks in part to its strong order book. He added, however, in an interview with the Financial Times: “We might need some support.”

Disputes over state support for Airbus and its US rival Boeing have caused transatlantic tensions in the past. This year European capitals have clashed with Washington over subsidies in Joe Biden’s $369bn climate law.

Airbus is receiving some research funding from European governments to explore technologies for a plane that could replace the A320 narrow-body aircraft in the second part of the next decade. It is also working on a shorter-range hydrogen-powered aircraft expected to enter service in 2035.

Neither programme has yet formally been launched, a process that will require billions of euros in funding.

Faury said he was “very committed” to a previous financing model in which European governments provided loans to build new aircraft, repayable when certain order levels were reached.

He added that such a model — known as repayable launch investment — created a “bigger partnership” between Airbus and European governments.

“We need to find acceptable mechanisms to incentivise private sector investment and share risks with governments in order to support the design and development of new aircraft programmes that will deliver the decarbonisation of aerospace,” he said.

Any new such partnership with European capitals could test a 2021 deal to draw a line under years of transatlantic trade disputes.

Almost two decades of disputes over Airbus and Boeing were resolved by the US-EU agreement. According to this both sides promised that future research and development funding would not harm each other.

Both Airbus and Boeing have since begun work on technology, including alternative wing designs, that could replace today’s best-sellers as pressure on the industry to cut carbon emissions rises.

While Airbus is focused on securing support for its research and technology work, any new funding mechanism for development would have to be agreed before the formal launch of its narrow-body programme, likely to be before 2030.

Airbus’s financial position has been bolstered by a record backlog of orders — more than 8,000 at the end of October — for both single-aisle and twin-aisle aircraft, according to aviation consultancy Cirium.

It said last month that it will deliver 720 commercial planes by year-end, despite persistent supply chain problems.

Faury will relinquish his role as head of the civil aircraft division to Christian Scherer, group chief commercial officer, in January next year. The move is intended to allow him to focus more on Airbus’ strategy and wider operational and geopolitical challenges.

The company is restructuring its defence and space division, which generated close to 20 per cent of group revenues of €58.8bn in 2022 and has gained prominence since Russia’s full-scale invasion of Ukraine.

Airbus is part of the Eurofighter Typhoon industry consortium and builds the A400M military transport aircraft, as well as satellites. Together with Safran of France, it is also the joint owner of ArianeGroup, the lead contractor on the Ariane family of European rockets.

Faury said he was “not satisfied with where we are on defence and space as a division” while adding that did not mean everything was underperforming.

The division is being reorganised along “business lines” focused on military air systems, space and cyber security. The military air business is performing strongly, Faury said.

He singled out the company’s space activities as an area of concern, noting that “space is very poor in terms of profitability and it is very competitive and it is very difficult to gain the scale effect that we would need to compete against American players”.

There are growing concerns in Europe about how to close the gap with Elon Musk’s SpaceX, which dominates the commercial landscape with its low-cost launch services.

“We need to be able to do more joint ventures, more partnerships [in Europe],” Faury said.

He said he expected it would take three to five years to “get all the benefits” from the reorganisation.

Despite its smaller share of total revenues, the defence and space business was “very important” strategically to Airbus, and responsible innovation that had benefited the whole group, Faury said.

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Top court has cast doubt over billions of euros in subsidies for semiconductor groups

Germany’s budget crisis could affect plans to hand out billions of euros in government subsidies to chip companies, potentially stymying its hopes of playing a significant role in the global semiconductor industry.

The German government has promised vast amounts of state support to international chipmakers investing in Europe’s largest economy. Intel, which is spending €30bn ($32.5bn) on two new factories in the eastern town of Magdeburg, is to receive €9.9bn in grants for its project, the largest foreign investment in the country’s postwar history.

But doubts about state support have grown ever since a bombshell judgment by the German constitutional court last month which has plunged the government’s spending plans for 2024 into disarray.

Politicians, industry experts and business leaders fear the semiconductor projects might fall victim to the budget imbroglio, an outcome they warn could inflict huge damage on Germany’s reputation.

“It would be an utter disaster for the image of Germany as a place to invest, because it would show that you just can’t rely on this country any more,” said Sven Schulze, economy minister of the eastern state of Saxony-Anhalt, where Intel is to build its fabrication plant.

“It would be a devastating blow, one we haven’t really seen before in our postwar history,” he told the Financial Times.

The crisis was ignited when Germany’s top court ruled that the government had violated the constitution by moving €60bn in credit lines earmarked for dealing with the Covid-19 pandemic into the “climate and transformation fund” — an off-budget vehicle it has been using to finance Germany’s industrial modernisation.

The subsidies for Intel and other chipmakers such as Taiwan-based TSMC were all supposed to come from the climate fund. The ruling sowed alarm among companies — not just the chipmakers but also other big groups that were due to receive grants, such as steelmakers who are investing vast sums to switch to carbon-neutral production.

The crisis strikes at the heart of one of Germany’s most important policies — its plan to become a big chip producer. That in turn forms part of a broader EU strategy to strengthen supply chains, enhance economic resilience and reduce the bloc’s dependency on Taiwanese suppliers — a potential vulnerability in the event of a confrontation between China and Taiwan.

Intel is not the only big investor Germany has attracted. TSMC, the world’s biggest contract chipmaker, has said it would invest €10bn in a new factory in the eastern city of Dresden, together with Dutch semiconductor maker NXP and Germany’s Bosch and Infineon. This fab has been promised €5bn in subsidies.

Meanwhile, Infineon is building a €5bn plant, also in Dresden, Bosch is investing €250mn to expand its Dresden cleanroom and US chipmaker GlobalFoundries is in the fourth year of an expansion of its wafer manufacturing capacity in the city. All three are banking on generous state support.

German Chancellor Olaf Scholz told a conference last month that he “absolutely wants” the chip factories to go ahead as planned. “It’s an important signal for the future, for all of us, that semiconductors are produced in Europe, especially in Germany, and particularly in eastern Germany,” Scholz said.

Schulze, who is a member of the opposition Christian Democrats, said he hoped Scholz was serious. “I’m not worried about the Intel investment because the chancellor has given a personal assurance it will proceed,” he said. “And if you can’t trust his word then you might as well give up on this government.”

But Robert Habeck, deputy chancellor and economy minister, told an event last week that the government might be forced to curb its ambitions when it came to subsidies, “deprioritising . . . one or the other project that doesn’t meet the strictest definition of carbon neutrality and economic security”.

Scholz, Habeck and finance minister Christian Lindner are holding crisis talks on how to resolve the budget impasse and cobble together a revised spending plan for 2024, with Habeck calling off a planned trip to the UN climate summit in Dubai to focus on the issue.

Intel and TSMC declined to comment on whether they feared their promised subsidies were at risk.

But people briefed on TSMC’s communications with Berlin said that if the German government reduces its subsidy commitment, the company may have to renegotiate the terms of its Dresden fab, including with its German joint-venture partners.

“Worst case is that if it turns out nine months from now that there will be no subsidies, we will have to cancel the project,” said one person.

Other companies have publicly expressed their concern about the effects of the court’s verdict. German automotive supplier ZF, which is building a chip factory in the western region of Saarland with US group Wolfspeed, said it was worried about the consequences for Germany as a place to do business.

“It’s a question of whether important industrial transformation projects can get off the ground in Germany or whether the future happens in other parts of the world,” ZF said.

Lindner has tried to dispel investors’ fears. “Agreements we’ve reached which are legally binding will be honoured,” he said in an interview with media outlet The Pioneer on Monday.

An example is the €564mn subsidy for Northvolt, the Swedish technology group building a battery factory in northern Germany. Habeck’s economy ministry announced on Sunday that it had won an exemption from the spending freeze imposed on the climate fund which would allow for the Northvolt subsidy to be paid.

But many of the agreed subsidies are not as far along as Northvolt’s. Of the 31 microelectronic projects given a green light by the European Commission last June under state aid rules, only 15 have received a formal promise of funding. Industry insiders say the rest risk being deprived of any government support.

“Anyone you speak to in the chip industry who has a project in Germany and has yet to receive a legally binding contract from the government is scratching their heads,” said one executive with knowledge of the subsidy issue.

Another executive at a chipmaker was more forthright. “Germany is not just the sick man of Europe — it turns out it’s also the dumb man of Europe,” he said. “This is a total fiasco.”