Thames confirms it lacks funds to repay loans

Thames Water has confirmed it has insufficient money to repay debts that will mature from April 2024, during a parliamentary hearing drilling down into the “murky” financial structures of Thames’ parent companies.

Interim co-chief executive and chief financial officer Alastair Cochran told the committee the parent company Kemble Water Holdings had external debts of £1.35 billion maturing between April 2024 and 2028, with £190 million due in the spring.

“The holding company does not currently have that money,” Cochran said, and explained it would seek to extend the terms. Discussions would hinge on Ofwat’s reaction to Thames’ PR24 business plans, he explained.

The CFO said discussions with lenders about extending the maturity of that debt would commence in the new year, but added it would depend heavily on Thames’ draft and final determination from Ofwat. This would influence lenders’ willingness to extend more finance to Thames.

“If there was that clarity around future equity flow then lenders would then be willing to refinance in the normal way that has been done in the past,” he explained.

If Thames’ does not get the final determination it hopes for, and cannot raise bills to the rate it proposed, Cochran said new funds would have to be found. “We would revisit plans to fit around the available funds, if investors did not find it attractive enough we would go to new investors to seek new investment equity from them.”

Appearing alongside Cochran was co-chief executive Cathryn Ross and chair Adrian Montague who apologized if £500 million of funding had been misrepresented at a previous committee hearing in July.

Funds were announced as new equity but it has emerged that they are tied to parent company Kemble Holdings as a convertible note.

Montague agreed that the £500 million “may look like debt”, but it was indeed equity and stood by his previous assertions that it was such. He said the conversion of the note was not mandatory, so while it could be repaid the expectation was that it would not be repaid to parent company Kemble.

Thames paid £37.5 million to its parent in October, “to keep Kemble secure” according to the chair, which he said was necessary to avoid prejudicing any new, future equity to provide services for customers.

“Thames is faced with unappetising series of choices looking forward. We want to preserve the corporate structure of interest to Thames because it allows us to access new equity. We must have new equity that the shareholders have conditionally agreed to supply here,” Montague said.

After repeated questioning on the complex ownership structure, Montague said it was indeed in billpayers’ interests that the regulated company, ultimately could keep borrowing money and all parts of the structure had “their own individual functions in terms of raising money”.

The nature of the ownership structure, which Montague explained evolved over time to the current state, was something he would want to change. “I would love to do that, and I have asked the questions. But I may have to ask several more times,” the chair said.

He refused to accept the accusation that ownership systems were “a complete shambles” from an outsider’s point of view, but described the financial structures seen across the water sector as familiar and functional to lenders.

Committee member Barry Gardinier’s anger was palpable when Ofwat’s chief executive and chair appeared.

He called out David Black for not exposing the structure of Thames to the committee in July or highlighting that equity could add debt to the business.

Black retorted: “You’re absolutely right that the risk is that they then make dividend payments to support debt at the holding company, which is why we’re asking them to explain that to us. If we’re not satisfied we can open enforcement action.”

Gardiner fired back that the enforcement could expose Thames to risk of not raising finance in future.

“You have an obligation to the billpayer and ultimately it’s the billpayer who is the one to suffer here – it’s the customer!

“They’ve got you by the short and curlies, haven’t they? You’re in a Catch 22 situation,” Gardinier inquired. “If you do your job to protect environmental quality and the billpayer and impose those fines on them for dispersing that £37.5 million, then ultimately the fine you can levy against them is a message to shareholders not to put any more money into this company, it’s going down the pan. That’s why you are impotent in this, isn’t it?”

Ofwat chair Iain Coucher – who was also giving evidence at the committee hearing – refused to accept that characterisation and repeated that dividend streams were essential to financing essential work.

“In this situation, if you put the screws on them for not meeting targets then you will choke off the investment this company needs if it is to turn itself around,” Gardinier pushed.

Black said protecting parent companies was not the business of the regulator and that failure was a known risk that would be allowed to take place without impacting customers, as was the case for Wessex Water.