A report in today’s Financial Times entitled "Thames Water owners pile group with debt" says that Thames Water's debts have risen to over £18 billion – up from just over £15 billion from 31 March 2022.

According to the FT, the increase in debt has resulted in part from the structuring of a £500 million cash injection by shareholders as a loan charging 8% in annual interest. The FT says that Thames Water presented the £500 million loan in March 2023 from shareholders as “new equity funding.”

This evening the House of Commons Environment, Food and Rural Affairs Committee released a statement commenting on the coverage in the FT and other media outlets.

Reacting to reports in the media today on Thames Water’s financial arrangements, Chair of the Environment, Food and Rural Affairs Committee, Sir Robert Goodwill, said:

“The news on Thames Water's financial arrangements today leads us to question the accuracy of evidence provided to our Committee by Thames Water in July. These recent revelations of Thames Water's financial situation raise further concerns about the stability of the company's finances and the actual ability of the company to invest the sums of money required to implement its turnaround plan.

“Thames Water customers need the company to solve the problems of unacceptable sewage discharge into water courses and water shortages during dry periods. Along with concerns over the implementation of the plans to remedy these problems, there are questions over the possibility that Thames Water customers will see a large rise in their bills associated with these plans.

“Our Committee will consider whether we need to call Thames Water back before us to explain how the evidence we heard stacks up against the recently reported revelations.”

THAMES WATER FINANCIAL STRUCTURE 

Image source: Thames Water 

According to the FT, the company’s accounts show that the recapitalisation involved the water company’s owners providing a £515 million convertible loan to Thames Water’s parent company, Kemble Water which has no income apart from dividends from Thames.

The loan is treated as a liability in Kemble’s accounts although it could in the future convert to equity.

Thames Water's Annual Report and Accounts for 2022-23 published in July 2023 states:

“On 29 June 2022, the Thames Water Utilities Ltd Board approved an updated business plan which forecasts £11.5 billion (2017/18 real terms) of total expenditure over the current 5-year regulatory period.

“To support Thames Water Utilities Ltd in the delivery of its business plan, shareholders provided an Equity Commitment Letter agreeing to contribute an aggregate of £500 million in equity, which was drawn in full by the Group in March 2023, and cascaded from Kemble Water Holdings Ltd to Thames Water Utilities Ltd via intermediate holding companies.”

However, Kemble Water Finance Ltd’s own Annual report and consolidated financial statements for the year ended 31 March 2023 separately stated:

“In March 2023, the ultimate parent company, Kemble Water Holdings Ltd (KWH) issued £515.0 million of Convertible Loan Notes to shareholders with net proceeds of £500.0 million after upfront fees. The net proceeds were cascaded to Kemble Water Eurobonds plc (KWE) by way of an intercompany loan mirroring the key terms of the external instruments, plus a 10 basis point margin.

“KWE used £476.8 million of the proceeds to increase its investment into the equity of Kemble Water Finance (KWF) and used £23.2 million to settle group relief liabilities owed to KWF. KWF then used the combined proceeds to settle £500.0 million of interest owed on its £3.1 billion intercompany loan from KWE, which KWE used to invest in a further £500.0 million of equity in KWF, resulting in a total increase of the share capital of KWF of £976.8 million. The net proceeds were further cascaded by KWF to Thames Water Utilities Ltd via intermediate holding companies.

“The company used the proceeds to invest £500.0 million into the equity of Thames Water Ltd (TWL), resulting in TWL recognising share capital for the same amount. TWL then used the proceeds to invest £500.0 million into the equity of Thames Water Utilities Holdings Ltd (TWUHL), resulting in TWUHL recognising share capital for the amount.

“TWUHL then used these proceeds to repay a total of £500.0 million intercompany loans including £444.3 million principal and £55.7 million interest on intercompany loans with Thames Water Utilities Ltd.

Commenting in Thames' Annual Report and Accounts for 2022-23, Alastair Cochran Interim Co-Chief Executive Officer & Chief Financial Officer at Thames Water said:

“Shareholder support for the delivery of Thames Water’s business plan and its management team was evidenced by the commitment of £500 million of equity funding, drawn in March 2023.”

In a presentation to investors on 10^th July, Cathryn Ross Interim Co-Chief Executive Officer and Alastair Cochran also referred to “£500 million of new equity funds drawn in March 2023.”

The FT says the group’s consolidated borrowings have risen to over £18 billion as a result of the £515 million increase in debt. According to the FT, this means any interest payments on the loan could ultimately be borne by customers through their bills.

Thames Water has a conditional agreement from shareholders to invest an extra £750 million in equity by 2025 – and the company says it requires a further £2.5 billion by 2030.

On 26^thOctober, water sector regulator Ofwat welcomed the additional £4.6 billion of investment in the water sector since 2020 with the publication of its annual Monitoring Financial Resilience Report (MFR) for the year ended 31 March 2023. Ofwat flagged up the fact that in accordance with the commitment made by shareholders in June 2022, Thames Water had received £500 million of equity on 30 March 2023 to support investment in AMP7 and the agreement by shareholders to provide a further £750 million of funding by 2025, subject to conditions. 

Independent auditors PwC flag up material risk

PricewaterhouseCoopers LLP (PwC) has been Thames Water’s external auditor PwC for five years – PwC was appointed as the Group’s auditor after a competitive tender in 2018/19.

Commenting in Thames Water Utilities Finance plc Annual report and financial statements for the year ended 31 March 2023, PWC said:

“Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the company’s ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.

“In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate.

“However, because not all future events or conditions can be predicted, this conclusion is not a guarantee as to the company's ability to continue as a going concern.”

Commenting separately in Kemble Water Finance Ltd’s Annual report and consolidated financial statements for the year ended 31 March 2023 concerning the group’s and the company’s ability to continue as a going concern, PwC said:

“We note as at the date of approval of the financial statements there is a material uncertainty relating to going concern for the company arising from the company's liquidity position and its ability to comply with certain of its covenants, specifically relating to

1. the refinancing of a £190m loan facility which is due for repayment in April 2024, for which there is insufficient committed funds available as at the date of this report; and

2. the company is forecasting to breach its Post Maintenance Interest Cover Ratio (PMICR) covenant in relation to a £200m loan owed by the company under a severe but plausible downside scenario."

PwC goes on to point out that the Directors believe that Kemble Water Finance Ltd (KWF) will be able to refinance the £190 million debt prior to April 2024. PwC comments:

“However, there is currently no commitment from a finance provider and therefore no certainty this loan will be refinanced prior to April 2024.

“In the event that the Group's financial performance is in line with or below the severe but plausible downside scenario, the Group will breach the PMICR covenant as at 31 March 2024. In this situation, the company would be able to "cure" the covenant breach via an injection of additional funding in the form of shareholder support or the receipt of dividend income originating from its primary trading subsidiary Thames Water Utilities Limited (TWUL).

“The Directors of Kemble Water Holdings Limited (“KWH”) received an Equity Support Letter on 10 July 2023 from their shareholders indicating their intention to provide future support to the group. However, the letter is not legally binding and there are no other firm commitments to refinance the £190m loan due for repayment in April 2024. Furthermore, the directors of KWF are also uncertain that Thames Water Utilities Limited (TWUL) will be able to pay a dividend by way of “equity cure” due to the Whole Business Securitisation (WBS) and regulatory ringfence.

“These conditions, along with the other matters explained in the accounting policies to the financial statements, indicate the existence of a material uncertainty which may cast significant doubt about the group’s and the company's ability to continue as a going concern. The financial statements do not include the adjustments that would result if the group and the company were unable to continue as a going concern.”

The immediate parent company of Thames Water Utilities Finance plc is Thames Water Utilities Ltd, a company incorporated in the United Kingdom, which owns 100% of the issued share capital of the Company and is the smallest group to consolidate these financial statements.

The Directors consider the ultimate parent company and controlling party to be Kemble Water Holdings Ltd, a company incorporated in the United Kingdom, and the largest group to consolidate these financial statements.