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Thames Water’s holding company Kemble has been downgraded by ratings agency Fitch due to liquidity pressures and ongoing scrutiny by regulators and parliamentarians.
Kemble fell from B to CCC, representing the second downgrade this year by Fitch, which it said reflects the need for Kemble to engage with lenders over refinancing of debts that mature from April 2024.
The holding company has debts of £1.35 billion that will mature between 2024-2028, with £190 million due in the spring that the company confirmed it would not have resources to pay.
Thames Water’s chair Adrian Montague and interim co-chief executives Alastair Cochran and Cathryn Ross told a parliamentary committee that financebility of Kemble’s debt was hinged on the determination Thames received from Ofwat for its business plan proposals for 2025-30 (AMP8).
Equity contributions by shareholders to Thames remain conditional, therefore regulatory clarity for AMP8 was key to securing the funds to service debts, the team told the committee last week.
Thames is in the midst of a turnaround to bolster financial resilience as well as overhaul operations to deliver better services for customers and the environment. Poor operational performance and underinvestment in the asset base over consecutive years has been blamed on bill rises being kept at or below inflation.
Fitch said a strong operational turnaround at Thames would be needed to improve profitability and the prospects for future dividend distribution to Kemble.
Thames’ senior team said dividend payments to the parent company are only made to service debts and allow the ongoing operation of the water company. However, regulator Ofwat has queried the validity of a payments of £37.5 million made to Kemble in October and formally requested information from Thames on the nature of the payments. If Ofwat is not satisfied it can bring enforcement action against the water company.
Fitch said this increased scrutiny from Ofwat on dividend distribution from Thames to Kemble increases the risk to the parent company’s primary source of cash flow that allows it to service debt. “This materially weakens debt market access for the holding company, in our view,” Fitch said.
The holding company is estimated to have cash balance of around £20 million, according to Fitch at the end of November, and its annual interest burden stands at around £80 million to £85 million.
“We do not forecast a cash lock-up at Thames Water in the remainder of AMP7,” Fitch said, “however, risk of regulatory cash lock-up is increasing in our view.”
From April 2025 this risk will increase when changes made by Ofwat to all water company licences come into effect. The regulator will have the power to block dividend payments if it believes a water company could be at risk of financial stability.
Thames’ senior team told the hearing last week that the functioning of the water company was dependent on its parent company being able to secure new investment.
After months of interim leadership, Thames announced its new chief executive will join the company in the new year. Ex-Centrica boss Chris Weston will begin on 8 January, freeing up Cochran and Ross to return to their original roles of chief finance officer and regulatory director, respectively.
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