The Kelda strategy going forward is to concentrate on three areas: water and wastewater services in the UK, water services in the USA and our 46% investment in the Waste Recycling Group plc. This new focus has already led to increased management emphasis on efficiency and service issues and allowed a greater regional focus on our environmental responsibilities. The Board continues to keep under review all proposals which will assist the growth and development of services to customers, while improving the attractiveness of the water sector to capital and equity markets generally. Our objective is to ensure sustainable service improvements and increased long-term investment in both infrastructure growth, essential cost maintenance, and the environment.
Kelda Group plc is one of the United Kingdom's leading water services and wastewater management companies. Through subsidiary Aquarion, acquired in 2000, the company is also an active provider of water services in the northeastern United States. Kelda's U.S. operations account for just 10 percent of its 2001 revenues. In the United Kingdom, Kelda is especially known for its Yorkshire Water Services wing, which, in the mid-1990s, had gained a reputation as one of the United Kingdom's most-hated companies. Since the late 1990s, however, the company has significantly improved its reputation while expanding its operations into the waste services field, especially through a 46 percent stake in publicly quoted Waste Recycling Group. The company adopted the Kelda name in 1999 in order to distinguish its non-regulated business from its regulated business. Worldwide, the company claims to rank within the top ten water services and sewerage companies. The company also operates through its Loop customer relationship management subsidiary, providing customer call services, billing and collection, and other services to Yorkshire Water as well as to third-party customers. Another subsidiary, First Renewals, concentrates on developing renewable energy sources, such as its 79 percent stake in Arbre Energy, a bio-mass power generation plant that uses wood chips. Kelda has taken the lead among the United Kingdom's water services companies, calling for the right to separate its water services operations into two components, the first a management services arm to be retained by Kelda, the second the assets of Yorkshire Water, to be acquired by its customer communities. Such a move, blocked as of early 2001 by government regulators, was expected to enhance shareholder value and in turn drive up the company's share price.
Water Privatization in the 1980s
The United Kingdom's water supply services, including the laying of piping and sewage systems, remained shared between local communities and private businesses until well into the 19th century. As the country's cities grew, particularly at the height of the Industrial Revolution, water services increasingly came under control of the local municipalities, which especially took over construction of water piping and sewage systems at mid-century. The passage of a number of Water Acts during the 1870s brought the United Kingdom's water services fully under government control, while leaving the nation's water services operating on a highly fragmented, primarily local level.
The high fragmentation of the United Kingdom's water utilities lasted throughout much of the 20th century. By the early 1970s, the country still numbered 28 individual "river" authorities, overseeing some 160 water services suppliers. The country also counted more than 1,300 separate sewage treatment operations. Tightening environmental restrictions and heightened demand for cleaner water left the country's water services largely at a loss, however, as the small size of nearly all of these operations made it impossible for them to invest in the necessary infrastructure improvements to bring themselves up to increasingly stiffer modern standards.
The British government began to take steps to streamline the already antiquated water utility situation in the United Kingdom, beginning with the passage of the Water Act of 1973. The new legislation established ten regional water authorities, which then became responsible for the entirety of the water supply, wastewater treatment, sewage treatment and disposal services, as well as the environmental protection and cleanup of the rivers and coastlines present in their regions. These authorities continued to be operated as government agencies, reporting to government on both the local and national level.
Yet the new water authorities continued to be hampered by a low level of investment and rapidly aging infrastructure during a time when the steady tightening of standards by the European Community, governing such issues as drinking water purity and the environmental impact of sewage disposal, were requiring water authorities to modernize their facilities and systems. The British government, led by Margaret Thatcher in the 1980s, balked at providing the huge sums necessary for revamping the United Kingdom's dilapidated water supply and disposal systems. Instead, the government added the water industry to the list of formerly government-run industries slated to be privatized by the end of the decade.
The U.K. water industry's time came in 1989, when the passage of the Water Act of that year returned the country's water supply and sewage treatment needs to the private sector. The ten water authorities were transformed into public liability companies with shares placed on the London stock exchange. In conjunction with the conversion of the public utilities into private companies, the government set up a regulatory body, the Office of Water Services (Ofwat), which was given a mandate not only to set pricing and capital investment levels, but also to provide oversight on the new water companies' corporate policies.
The public status of the newly privatized water companies enabled them to raise capital in order to pursue extensive capital investment programs in order to comply with obligatory environmental and operational infrastructure improvements. Despite the required infrastructure investments, most of the new water companies swiftly began turning out strong benefits--in part because of a series of price increases. In some cases, the water companies' customers saw their water bills nearly double in amount. A series of mishaps--including high leakage rates and recurring tap restrictions, as well as other public relations gaffes, such as a wave of so-called "fat cat" executive salary packages--quickly brought a great deal of consumer distrust to the nation's water companies.
Among the most singled-out for customer outrage of the new water companies was Yorkshire Water Services. The company had already inherited a poor record of performance, which quickly degenerated into a steady series of drought measures, including outdoor hose bans, since its transformation into a publicly held company. At the same time, the company was gaining one of the highest customer complaint rates in the country. The company continued to scale back on personnel--reducing its payroll nearly by half by 1994--while struggling to meet the demands of its ailing infrastructure. By the early 1990s, Yorkshire Water had one of the worst leakage rates in its industry. In some parts of its region, it was losing more than 30 percent of all the water it was pumping. Meanwhile, the company's customers faced new drought measures each year.
Yorkshire Water's troubles seemed to culminate in 1996 after a 15-month-long drought forced the company to begin trucking in water from neighboring regions in order to meet customer demand. At one point the company was even forced to consider radical "rotacuts," that is, cutting off water on a rotating basis, a move that would have crippled the already fragile Yorkshire economy. At the height of the crisis, Yorkshire Water was trucking in more than 70,000 tons of water per day with a fleet of more than 700 tankers brought in from across the United Kingdom and continental Europe. Adding insult to injury was the statement of the company's then CEO, Trevor Newton, who claimed not to have showered at his home since the beginning of the crisis. That statement was proved to be only partly true when it was revealed that Newton had taken to traveling outside of the Yorkshire region for his showers. Meanwhile, Newton, as well as the company's other directors, continued to enjoy healthy salary increases, embroiling the company in the so-called "fat cat" scandals of the mid-decade.
When the drought finally eased, Yorkshire Water found itself considered one of the country's most-hated companies. The resulting outcry saw both Newton and former Chairman Gordon Jones ousted from the company, in a shakeup that produced a clean sweep of most of the company's executive board. Taking their place were Chairman Brandon Gough and CEO Kevin Bond, who set to work restoring the company's image and operational efficiency. The latter proved easier than the former, especially as the company succeeded in laying more than 220 kilometers of new pipe in 1996 alone. Meanwhile, the company sparked a new round of "fat cat" controversy when it not only awarded healthy bonuses to Bond and other members of executive management, but also raised its customers' rates.
Across the Water in the 21st Century
Yorkshire Water was not the only water company to face criticism from consumers. Indeed, most of its competitors were subject to similar dissatisfaction rates. Yet, like many of its competitors, Yorkshire Water had begun to diversify its operations beyond its regulated water business, entering the related, but non-regulated field of waste management and disposal services. The company's first move into this area came in 1993 when it acquired Alcontrol, which began providing environmental laboratory and food testing and analysis services under the Yorkshire Environmental Services name. Yorkshire Water quickly built up a strong position in the specialty area of medical waste disposal, under subsidiary White Rose Environmental. In 1997, the company captured the leading position in that segment in the United Kingdom when it purchased competitor Clinical Waste.
Yorkshire Water had also been steadily building its waste management wing during the 1990s. In 1998, the company's interests in that field expanded when it merged its Yorkshire Environmental Global Waste Management division into Waste Recycling Group, in what became a reverse takeover giving Yorkshire Water a 46 percent share of WRG. That company had initially been founded in 1983 and went public in 1994, when it began an aggressive expansion-through-acquisition campaign. By the time of the merger announcement, Yorkshire Water's waste management assets had already deepened with the £120 million purchase of 3C Waste, which had formerly been owned by three community councils. The purchase also helped place WRG and Yorkshire Water among the United Kingdom's largest landfill operators.
The spinoff of its waste management services operation allowed the company to concentrate on other areas of business, such as the generation of electrical power from alternative fuel sources. Among the company's projects in this area was the launch of Arbre, in a joint-venture with Sweden's TPS Termiska and the Netherlands' Royal Schelde Group. Construction of the Arbre facility, which became Europe's first commercially operated wood-fuel power plant, began in 1998, with energy production starting in 1999. Yorkshire Water initially held an 85 percent stake in the project, which provided an important outlet for disposal of its majority shareholder's sewage sludge.
Yorkshire Water had not abandoned its interest in expanding in its core water services area, however. Blocked from expansion in the United Kingdom by government resistance to mergers among water companies in that country, Yorkshire Water instead looked overseas. In 1999, the company paid $600 million to acquire water services company Aquarion. That company's operations focused primarily on Connecticut and Long Island, New York, through its main subsidiaries, BHC and Sea Cliff Water Company, and was to serve as a springboard for Yorkshire Water's intended expansion into the heavily fragmented U.S. water services market. The company hoped to generate as much as half of its revenues in the United States by 2004.
In the meantime, the Aquarion purchase led the company to change its name in order to reflect the diversification of its interests. Choosing the name Kelda, taken from a Norse word for "source of water," the company also hoped to put behind it the bad publicity of its Yorkshire Water subsidiary.
Ofwat-imposed price cuts starting in April 2000 forced Kelda, now led by Chairman John Napier, to launch a strategic review of its operations. Barred from pursuing takeovers at home, the company attempted to spin off its water services assets in a controversial move that would place ownership of its assets in the hands of its customers, that is, the communities the company served--returning up to £1.2 billion to Kelda's shareholders--while Kelda was to retain operational control of its water services division. The move was swiftly blocked, however, by regulator charges that such a spinoff would benefit Kelda's shareholders, but not its customers. Thwarted, Kelda instead began trimming its operations, regrouping around its core water services and selling off such non-core assets as Alcontrol and White Rose Environmental.
In 2001, Kelda continued to press regulators to loosen up takeover restrictions among U.K. water services, complaining that the existing regulations enabled foreign takeovers of U.K. water companies while blocking mergers among the country's domestic companies. Meanwhile, Kelda continued to pursue its expansion in the United States. In August 2001 the company agreed to pay $118 million to acquire four companies (Connecticut-American Water Company, Massachusetts-American Water Company, New York-American Water Company, and Hampton Water Company) from American Water Works Co. The deal added more than 64,000 new customer accounts to Kelda's existing U.S. operations, boosting its revenues from that country by more than 50 percent. The deal, expected to gain government approval in early 2002, was also seen as a starting point for a possible consolidation of the United States' more than 64,000 water companies.
Principal Subsidiaries: Aquarion Company (U.S.A.); Arbre Energy Limited (79%); BHC Company (U.S.A.); Sea Cliff Water Company (U.S.A.); Fibro Holdings Limited (31%); First Renewables Limited; Grampian Wastewater Services Limited; KeyLand Developments Limited; Loop Customer Management Limited; Yorkshire Water Projects Limited; Yorkshire Water Services Limited; Yorkshire Windpower Limited (50%); Waste Recycling Group plc (46%).
Principal Competitors: Southern Water PLC; Anglian Water PLC; Severn Trent Water PLC; North West Water Group plc; Thames Water plc; Wessex Water PLC; Pennon Group Plc; Glas Cymru PLC; Northumbria Water PLC.
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