The Chief Executives and Chairs of both Thames Water and Ofwat endured intensive questioning yesterday from the House of Commons Environment Food and Rural Affairs Committee in a compelling live evidence session which at times made for uncomfortable viewing.

Folllowing their appearance before the Committee in July, the MPs had recalled their witnesses in the light of reports in the Financial Times regarding Thames Water's finances.

The water company, which serves 15 million households, is struggling financially - Thames Water and its parent company Kemble Water is in debt to the tune of some £18 billion. The utility has £1.4 billion of external debt maturing in the coming years, including £190 million in April 2024. Currently the utility does not have the funding to cover the latter amount.

Neither the Ofwat nor Thames Water chiefs covered themselves in glory during the session as they faced tough questioning and at times exasperated comments from the Committee. Probing questions as the Committee tried to square the gaps and inconsistencies put both Thames and Ofwat very much on the back foot.

Much of the discussion was devoted to the complexities of Thames Water's financial structure – described by Committee Chair Sir Robert Goodwill MP (Conservative) as Byzantine. Other questions raised in the wide-ranging evidence session included Thames Water proposed redundancies, operational performance issues and the recent payment in October of £37.5 million in dividends from the water company’s regulated operating company to its holding company Kemble Water Finance.

Thames Water Chair - “we were very fragile in July”

In the first evidence session with Thames Water, Chairman Sir Adrian Montague, who is also the chair of parent company Kemble Holdings, told the Committee:

"This is a seminal moment for Thames. You know, we were very fragile in July."

Questioned on the £37.5 million dividend payment, Sir Adrian suggested that a failure to give dividends “would curtail or derail the possibility of receiving further equity from our shareholders”. The payment is now being further investigated by Ofwat.

He attributed Thames Water’s financial woes in part to bills being kept “very low” by Ofwat in previous years, saying:

“I think we would say that some of the problems that we are now encountering were because bills were kept deliberately very low over the past period.”

Sir Adrian was appearing alongside interim co-chief executives Alastair Cochran, who is also Chief Finance Officer at Thames Water and Cathryn Ross, formerly Chief Executive at Ofwat between 2013 and 2018.

Asked by MPs if Thames Water’s holding company had enough to meet the first repayment of £190 million, Alastair Cochran said: “Not currently, no.”

Sir Adrian explained that the company was in discussions with lenders about extending the deadline until after Ofwat has published its 2024 price review, commenting:

“We will talk to the lenders about it in the new year and our proposition is ‘please can you extend that maturity’ because everything about Thames will be much clearer from a financial perspective after we have received Ofwat’s determination,”

The Co-CEOs also told the Committee that the previous eight year turnaround plan put in place by former Chief Executive Sarah Bentley before her abrupt departure in June had been replaced by a revised three year plan. However, they acknowledged that it would take longer than three years to complete a necessary overhaul.

Ofwat thought concerns in July about cash flow and short-term financial issues "were overstated"

Chair Sir Robert Goodwill began the second evidence session with Ofwat Chief Executive David Black and Chair Iain Coucher by saying that in July they had expressed confidence in terms of Thames Water’s resilience and financial position and enquiring whether they still held that view.

Ofwat CEO David Black 

David Black said that in July they had set out two concerns about operational performance and financial resilience, adding:

“We were clear at the time there was lots of discussion about Thames having cash flow issues, short-term financial issues – we thought those were overstated.”

Sir Robert raised the issue of turnaround plans, saying that the Committee had heard in the first session how an 8 year long term plan has gone to a 3 year plan and asked whether Ofwat were “fully involved in those changes” and “content that the changes were still going to deliver for customers.”

David Black explained that Thames had been presenting the revised plan to Ofwat – including another session in the morning before the evidence session had started - to talk about the turnaround plan. However, Ofwat was currently examining that plan so it was “too early to say whether we are satisfied that the plan will succeed in turning around the business”.

Sir Robert also asked what assessment Ofwat had made of the chances of Thames actually successfully delivering the improved services.

Black agreed that Thames was facing “an extremely challenging situation” but went on to say:

“They run a monopoly business they ought to be able to institute a turnaround plan, they ought to be able to address those issues. They’ve been very open in terms of the fact that they haven’t had the information, they haven’t had the management processes in order to drive the performance that they should have done in that business.

“We’re confident that they can make those improvements, the question is whether they will make those improvements and that will require backing from shareholders.”

The Ofwat chiefs came in for some particularly direct questioning by Committee member Barry Gardiner.

Questioning David Black about his appearance before the Committee in July and his welcoming of the £500 million equity, Barry Gardiner pointed out that he had not mentioned anything about the structure of the funding, the additional debt that it loaded onto the ownership of the holding company Kemble Water.

Commenting “Did they blindside you? Or did you blindside us?” he asked Black:

“Why didn’t you expose that structure? Did you not know it – or did you know it and simply think that this Committee might not be interested? “

Unsatisfied by the response that Ofwat regulates the regulated business, he reiterated:

“You haven’t answered my question – my question was were you aware of the structure of that equity injection and the debt that that it left with the holding company at the time when you appeared before this Committee and if you were, why didn’t you tell this Committee about your proper concerns that ultimately could rebound on bill payers?”

David Black explained that Thames had provided their financial returns to Ofwat on 15th July - around the time of their appearance before the Committee - saying “I hadn’t been through that information so I wasn’t aware of the source of that finance.”

“The key question from Ofwat’s perspective is do we have the controls to protect customers’ interests against dividends being paid to support the holding company debt - the answer is we have now put those controls in so that’s the difference,” he added.

Pursuing his increasingly blunt line of questioning, Barry Gardiner went on:

“You know very well – and we’ve just heard it as you have – from the Chairman, from the acting Chief Executives - that actually, if you do exercise those controls, then the shit really does hit the river!”

Further irked by David Black’s response that that was “a question for Kemble Water”, the MP emphasised:

“NO it’s not! It's a question for you because you have an obligation to the billpayer! And ultimately it's the billpayer that’s going to be the one that suffers here. It’s the customer isn’t it?"

Ofwat Chair Iain Coucher

Ofwat Chair Iain Coucher intervened, saying:

“We were satisfied that with regard to the injection of equity in the summer it needed that funding to support its business. So we saw equity coming in and we gave you assurances that was happening. We have got controls over whether funds can be released from the operating company to pay dividends. We will only allow dividends to be paid if it is in the best interests of consumers and it meets other obligations. We look after consumer interests by only allowing dividends to be repaid to support their businesses, as and when the business can afford to do it.”

“They've got you by the short and curlies haven’t they?

Barry Gardiner replied:

“They,ve got you by the short and curlies haven’t they? You know you’re in a Catch 22 situation – if you do what your job is, to protect the environmental quality, to make sure you protect the billpayer and you impose those fines on them for dispersing that £37.5 million, then the result of that – the 10% that you can levy against them that sends a direct message to their shareholders “Don’t put any more money into this company its going down the pan. And that’s why you are impotent in this, isn’t it?"

In response to Iain Coucher’s comment that he didn’t accept that characterisation, the MP said:

“Why is it that Thames Water's Chairman did? Why is it that the Chairman was very clear that what you can do is a threat to the holding company and therefore, a threat to the whole operation?”

The Ofwat Chair suggested that the whole business construct - debts and equity payment – relies on institutional investors putting up billions of pounds to fund the business going forward, adding:

“So we need to allow dividend streams to go to companies. We will do so as long as we're satisfied the company can afford to make those payments and it's in the best interests of customers. We’ve got to allow dividends otherwise you won't get the dividends in the first place.”

Asked how confident Ofwat was that its new powers to investigate dividend payments would have a positive impact on the water industry, David Black replied:

“This has been quite contentious from an investor perspective – there has been considerable resistance to Ofwat introducing these powers so investors are rightly concerned this will constrain the flow of dividends from water companies.

“But where there is common ground both Ofwat and investors would agree that dividends should be linked to performance. Our view which we’ve had for some time is that dividend payments should be linked to performance for customers and the environment."

With regard to whether it be helpful to Ofwat to be able to look at some of the holding companies in more detail, Black commented:

“Our concern is two-fold – is there enough transparency around these financing structures. These are public utilities so we think it's absolutely right that financing should be transparent. I would also note it is complex and difficult to understand so we think companies have responsibility to explain to customers and all stakeholders as well as us as a regulator.”

“Kemble is just a shell company and is the vehicle for accruing debt"

Barry Gardiner was particularly critical, saying:

“Kemble is just a shell company and is the vehicle for accruing debt that if it were accrued in Thames Water you would be jumping all over it. How you can say that well we only look at the regulated company, we don’t have a view on what goes on above - of course you must have a view on what goes on above. This is the way they get round you and yet you're saying we’ve just got to do our job, Parliament has set these limits for us to look at.”

On the issue of whether possible nationalisation of Thames was being considered and prepared for by Ofwat, David Black explained that the special administration regime was set up as a backstop provision to ensure that service keeps being provided to customers even if a water company was to fail. A special administrator would be appointed that runs the business and then seeks to sell it to a new owner.

He acknowledged that there would be a question for Thames Water in terms of finding new investors, saying:

“So that would be that would be the challenge for Thames Water – and I wouldn’t underestimate that challenge, that is significant.”

The Committee Chair asked:

“Just to be clear, so if a water company did fail, it would be the shareholders who would carrying the can and not the UK taxpayer? Is that correct?”

According to David Black, there “would be a question as to how that business would be financed in the period of administration and it was “difficult to speculate in terms of what might be required.”

Barry Gardiner asked some particularly pointed questions about Thames Water under the previous ownership of the Macquarie Group, asking David Black:

“Would you agree that the way in which Macquarie extracted money from the company is the reason that the company is now in the situation it is in to a large extent? And can you remind us who was in your position as the head of Ofwat when Macquarie were doing that?”

“Was it not the interim CEO at Thames Water who was previously in your position as Chief Executive of Ofwat? … Strange that somebody who allowed that to happen as the Chief Executive of Ofwat then went on to become the Chief Executive of Thames Water itself?

In response, the Ofwat CEO said:

“With regard to Macquarie, I think it’s very easy to blame Maquarrie and say oh yes Maquarrie they were the reason, they caused problems at Thames,” adding “I think its true to say Macquarie earned very high dividends out of Thames.”

Click here to watch a full recording of the evidence session.