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Damning record of firm behind Forth sewage spill

OPERATORS of the plant which pumped millions of litres of sewage into the Firth of Forth last weekend have been involved in a string of incidents over the last two years, it emerged today.

Thames Water, which runs the Seafield complex on behalf of owners Scottish Water, has been fined 147,000 according to Environment Agency figures.

The news has emerged in the wake of beaches and seawater near the plant, which suffered a catastrophic pump failure last Friday night, being given the all-clear.

City council chiefs said tests undertaken on samples from the Forth had shown there was no risk to anyone using beaches or bathing in the water.

Around 100 million litres of sewage poured into the sea from the works and led to the public being warned to stay away from the shoreline.

Both companies and the Scottish Environment Protection Agency have launched probes into the affair, which saw the discharge continuing until Monday morning when temporary pumps were installed. The two firms face unlimited fines and possible jail sentences over the incident.

To read this story in full, pick up a copy of the Evening News

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Refineries join EPA for cleaner industry

WASHINGTON, March 2 (UPI) — Oil and gas refining companies will work with the U.S. Environmental Protection Agency to improve the environmental impact of manufacturers.

The EPA said the energy exploration and refining industry has become the 13th industry to join its voluntary sector strategies program. The primary contacts from the industry will be the American Petroleum Institute, the Domestic Petroleum Council and the Independent Petroleum Association of America.

There are more than 20 national trade associations working with the EPA to improve their environmental performance. The 12 participating sectors include: agribusiness; cement manufacturing; specialty-batch chemical manufacturing; colleges and universities; construction; forest products; iron and steel manufacturing; metal casting; metal finishing; paint and coatings; ports; and shipbuilding and ship repair.

UK Treasury reappoints Kate Barker to BoE’s MPC for further 3-year term

LONDON (Thomson Financial) - The UK Treasury has appointed Kate Barker to the Bank of England’s Monetary Policy Committee for a further three-year term, it said today.

Barker’s term with the BoE’s rate-setting committee started on June 1, 2001 and is due to expire on May 31 this year.

“I am delighted that Kate Barker has agreed to serve a further term on the Monetary Policy Committee,” said Chancellor of the Exchequer Gordon Brown.

“Kate has brought valuable expertise to the MPC over the past six years, and continues to be a great asset to the Committee,” Brown said.

carlo.piovano@thomson.com

cp/cp/ejp

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Weekend Reading

Past performance is not a guarantee of future performance.

I remember a time when Fannie Mae (FNM) was a failed financial company, viewed no better than a savings and loan during the lending crises of the 1980s.

The FDIC and Congress worked through the savings and loan debacle, while a restructured Fannie Mae provided much-need capital and liquidity for the financial lending system. Those shareholders who were patient with this stock saw it move from a low of $2 in December of 1987 to a high of $89 in December of 2000.

Flash forward six years.

This week, Ben Bernanke issued a warning that all financial crises involve the failure of a large entity and originate from oversight failure. He clearly spelled out a case against two government sponsored entities: Fannie Mae and Freddie Mac (FRE) . In the process, he pointed out that their combined outstanding debt exceeds $5.2 trillion, more than the $4.9 trillion of public government debt.

So what’s Bernanke’s problem with the government sponsored entities (GSEs)?

The situation is pretty clear. These are two large entities at the heart of the financial markets where investors incorrectly continue to assume an implied government guarantee. And the misplaced incentives reward the companies for taking risks.

The effect, according to Bernanke, is a pair of undercapitalized entities that, unlike banks, will not protect investors. Shareholders must bear the burden of a restructuring when it occurs.

It seems the market agrees. Fannie Mae shares were down 3.5% to $54 during the last five days. In the same period, Freddie Mac shares were down 3.2% to $62 per share.

While these two stocks currently have yields around 3%, we think it’s best to avoid adding more to positions in these two stocks until the recapitalization plans are clear. Who knows, maybe the investment bankers can help the GSEs attract some of that Far East excess capital. It may seem less risky an investment from abroad.

Speaking of the Far East and companies with foreign business franchises, this week American International Group (AIG) sold $1 billion in 30-year hybrid bonds to fund its $8 billion share repurchase program. It joins a variety of financial services companies, including Travelers (TPK) and Liberty Mutual, that are using the debt markets to raise capital that qualifies as a form of equity with the rating agencies.

If the AIG repurchase program is completed during 2007, this would represent 4.5% of the shares outstanding.

It’s clear that AIG President Martin Sullivan wants holders of junior bond securities to pay off shareholders while the company figures out where its excess capital is and how to get at it.

Those with long memories will recognize this debt-to-equity approach as a very successful strategy used by the formerly public American General, a company that is now part of AIG’s U.S. operations. As American General’s debt came to maturity, bondholders took the stock and increased shareholder value.

Unfortunately, no guarantee of the same excess returns for investors is baked into the new hybrid securities. While AIG management appears to have a recapitalization plan based on computer simulations, the challenge here will be to get key regulators, major agencies and shareholders to understand that less is more.

Over the last year, AIG shares have returned only 5%. Being the pragmatic types, AIG management also announced that we should expect acquisitions and divestitures that should free up capital too.

For those looking for a real buyback program, we recommend a closer look at Prudential (PRU) , which also has the benefit of a Far East connection with its significant life operations in Japan.

International business accounted for 25% of total 2006 revenue. The company appears to be hitting on all cylinders now and has returned 20% over the last year. Over the last year, Prudential shares returned 20%.This one looks like a more appealing use of shareholder capital.

Paulson wants action from China

NEW YORK (AP) - Treasury Secretary Henry Paulson said Friday that China was not moving quickly enough on currency reform, and said he hoped high-level talks next month would produce results.

“They’re not moving in my judgment quickly enough,” Paulson said in a speech in New York. “I feel quite strongly there’s a need to move more quickly in the short term, but we need to get to a point in the intermediate term where China has a market-determined currency.

“There are many countries in world that don’t have a market-determined currency, but China is by far the largest.”

He said, “That, in and of itself, is a bit of an unnatural act.”

Paulson has been pushing China to move more rapidly to allow its currency to rise in value against the U.S. dollar as the Bush administration seeks to ward off a protectionist backlash in Congress over record U.S. trade deficits. Last year, the United States reported a record $232.5 billion trade deficit with China.

The two countries hold their next high-level talks in Washington May 23-24, the second round of what is known as the “Strategic Economic Dialogue.” Paulson began those talks in China in December.

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