Thames Water chiefs were on the defensive when they appeared in person before the House of Commons EFRA Committee earlier this week in an intensive two hour evidence session which made for compelling – and at times uncomfortable – viewing.

The water company chiefs faced detailed questioning on issues including executive bonuses and pay packages, the pension fund, the non-functioning Beckton desalination plant, an emergency £3 billion loan, around 100 delayed AMP7 projects, investors, levels of company debt, discussions with Ofwat over penalties and the selection of infrastructure investor KKR as the sole preferred bidder.

Following the hearing, Chair of the Committee, Alistair Carmichael MP released a statement saying:

“Our hearing with Thames Water bosses this morning raised real concerns about the company’s commitment to transparency and accountability to its customers. Alarm bells are ringing about the processes underpinning its proposed takeover bid by KKR and the potential for a corporate stitch up that benefits those at the top and fails to deliver for customers and the environment.”

Appearing before the Committee alongside Steve Buck, CFO and Sir Adrian Montague CBE, Chair of Thames Water, CEO Chris Weston opened the discussion by setting the background to the current situation at the utility.

Saying his two priorities coming in were, firstly, to create stability around the finances and restructure the balance sheet and secondly, to create a firmer operational foundation, he told the Committee that Thames Water was “a big ship to turn around” which was “very difficult”.

Chair of the Committee Alistair Carmichael responded by saying it was “apparent to few who actually controls and owns Thames effectively at the moment” questioning Weston’s total salary package of £2.3 million, and his acceptance three months into his tenure of a bonus of £195,000.

“I made a difference within the first three months” Weston explained, going on say that the crisis at Thames had been “decades in the making and that “all actors had had a role to play,” commenting:

“The company and management have absolutely got it wrong. Five chief executives in five years is not a recipe for success…Equally, the fundamental problem has been with the regulatory regime.”

Alistair Carmichael continued:

“You have a complete monopoly, you effectively have the Government standing behind you, and you still manage to come to this place….we need to gain from you—as a leadership team—a better understanding and acknowledgement of how we got to this place.”

Sarah Dyke MP asked Sir Adrian Montague about the eight-year turnaround plan announced in March 2021 by then chief executive, Sarah Bentley which was subsequently followed in December 2023 by then interim CEO, Alastair Cochran, informing the previous Committee the company had refocused on a three-year turnaround plan to improve both the operational and financial performance.

Sir Adrian Montague: “we know we are letting customers down”

Asked how he would assess the success of that plan, Sir Adrian said:

“The December plan is still current and making good progress. It is perhaps an opportunity to say that we realise there is a vast amount to be done to bring performance up to scratch. We know we are letting customers down. We know that pollutions, spills and supply interruptions cause inconvenience and sometimes real hardship.”

Chris Weston faced detailed questioning on the six priorities Thames Water is delivering around health and safety, pollution, customer complaints, water quality, leakage, and supply interruptions. He described leakage as “the most frustrating area” and pollutions as the other frustrating area.

Alistair Carmichael on Beckton desal plant: “far from clear whether it has ever worked at all”

The Committee Chair raised the specific issue of Thames’ £250 million Beckton desalination plant, saying it had been reported that morning as “not going to be operational this year” and pointing out that “it was not operational the last time it was needed in 2022.”

“It is far from clear whether it has ever worked at all,” he suggested, asking, “has it ever worked properly?”

Chris Weston: "it was not a good investment and there are no excuses about it"

Chris Weston said Thames had a team at the desalination plant that is “working very hard to try to make it work.” Acknowledging that the plant was not going to work this year, he continued: “the desalination plant is a big problem for us. I wonder why it was built in the first place… It is not a good story, it was not a good investment, and there are no excuses about it.”

He explained that the plant relies on a “very complicated and expensive process” which included treatment membranes which are now at the end of their life. However, Thames could not replace them because there is “currently no testing facility in the UK” that allows it to test the new membranes, or any material that comes into contact with water that is being prepared for drinking.

Suggesting that this was an issue for “the whole industry to try to address.” he added that this has been “going on for about a year.”

Weston was also questioned about water resources and the prospect of shortages, and possibly drought during 2025. Asked by the Chair about how confident he was that Thames would avoid running out of water in the summer, the water company CEO replied:

“I am confident we will not run out of water. I am not confident that we will not have to restrict usage because that will depend on what the weather does and what rainfall happens between now and the summer.”

Helena Dollimore MP: Thames “rowed back” on infrastructure commitments and spent it on bonuses and dividends

In some particularly forthright exchanges, Helena Dollimore MP then went on to question Sir Adrian about previous commitments made by Thames Water to Ofwat in 2019 to undertake a series of vital infrastructure projects to prevent storm overflows, reduce pollution instances and improve water security.

She asked:

“In 2023, Adrian, just after you became chairman, a letter was sent to Ofwat to say that you would not be taking those 100 projects forward; you would be delaying them further. Instead, the money allocated by Thames Water for those projects was spent on other parts of the business, including paying bonuses and dividends.

“Adrian, how can customers have any confidence in your turnaround plan and commitment to improve your infrastructure if—in just the recent history—you have rowed back on commitments made to the regulator to fix this vital infrastructure and instead spent it on bonuses and dividends?”

A clearly irritated Sir Adrian replied:

“I will talk about the decision we took in August 2023 to defer this further work.”

Helena Dollimore responded that the decision was also to pay some money to bonuses and dividends; commenting: “the two are linked, so address the two together.”

Sir Adrian Montague: running a £20 billion corporation on five weeks’ liquidity is honestly hairraising”

The water company Chair insisted:

“That was not the reason we took that decision; we took that decision because of the funding pressures on the business as a whole…..

“The fact of the matter is - as we have noted on several occasions—in the last year, Thames has come very close to running out of money entirely. There were times in the last year when we had five weeks’ liquidity. Running a £20 billion corporation on five weeks’ liquidity is honestly hairraising.”

“How can customers have any faith that you are committed to turning around the business?”

Helena Dollimore returned to the attack, asking him:

“How can customers have any faith that you are committed to turning around the business and reducing sewage pollution incidents and water outages if these 100 vital projects - projects that you committed to the legal regulator you would do in 2019 - were rowed back on?”

Describing the situation as “a funding crunch”, Sir Adrian he did not think Thames had rowed back – the firm was having to prioritise, and had prioritised asset health and the routine expenses of the business in preference to “this big capital programme, which will be carried forward into this current AMP and done as the funds become available.”

The MP reiterated her criticisms:

“Just to be clear, these 100 projects were committed to be done in the 2019-24 period. Customers were charged on that basis for these works, but they were not done, so you have rowed back on those commitments….You clearly rowed back on commitments, and the impact of that is clearly seen.”

Sir Adrian emphasised that “the cash box was very nearly empty a lot of last year” and that “cash is the only measure that counts; that is what you spend.”

Massive difference between levels of bonus paid to senior executives and the most junior employees

Helena Dollimore went on to question the difference between levels of bonus paid to senior executives and the most junior employees who were out repairing water leaks on the roads.

Contrasting Weston’s on target performance bonus of 156%, with bonuses of between 3% to 6% paid to the lowest-paid members of staff, she observed:

“It sounds like you are interested in attracting and retaining those at the very top of the company, but those who are the most junior members of staff - doing the hard work on the frontline - are not receiving the same treatment, and that discrepancy is very clear for all to see. If you were truly committed to fixing your infrastructure, you would have more focus on the morale and support to those frontline members of staff.”

She went on to question Chris Weston on operational issues, before returning to more detailed questioning of Sir Adrian Montague on dividend payments and deferred projects.

In a fractious exchange between the MP and a somewhat irritated Sir Adrian Montague, Helena Dollimore made a number of trenchant comments about bonuses and dividends.

Referring to “the fact that 100 critical projects were delayed and some of that money was diverted to bonuses and dividends” she pointed out that he had not addressed the fact that “some of that money was used to pay dividends, which is something Thames Water has been fined for doing.”

Sir Adrian Montague – “shareholders told us we had to pay dividends to keep prospect of more capital injection alive”

Sir Adrian responded that there were two dividends – one in October 2023, which he said “from memory” was £157 million, and another in February 2024, commenting:

“The October dividend was paid to keep our discussions with the then shareholders about injecting more capital into the company. They told us—in terms—that we had to continue to pay those dividends to keep the prospect alive of more capital being injected into the company.”

Thames was trying to find a basis - in discussion with the existing shareholders - for them to put “substantial billions of new capital into the company ...It was for that reason that we paid that dividend in October, to ensure that we kept those discussions alive because the shareholders said, “We need these dividends. We need to pay our debt service at the level of Kemble.” He explained that the dividend was an intergroup dividend to allow debt service to be paid at a higher level in the company.

The MP replied that customers would “draw their own conclusions from this evidence session” saying: “A decision was made to defer vital infrastructure projects. We have seen pollution  incidents go up in the time since. A more reliable investment of that money may well have been on fixing infrastructure.”

“No commitment that there will be no change in the leadership team over five years; it is simply not possible”

Further questioning by the MP on the “huge changes in leadership” seen at Thames and her request for Sir Adrian to provide a commitment that the team in front of the Committee is “the team we will have throughout this Parliament” led to the response:

“No... No one will give you a commitment that there will be no change in the leadership team over five years; it is simply not possible.”

In reply, Helena Dollimore said:

“Adrian, if you will allow me to finish the point, we ask the questions at this Committee. We have seen many changes of leadership. At every evidence session, the Committee have been given big assurances by that set of leadership. Then, at the next evidence session, we have a different set of leadership before us, apologising for the mistakes made under their predecessors.

“So how can the Committee have any faith in the assurances and the commitments that your team are giving us today when we have seen so many changes and row-backs on commitments that we will not simply have a new set of leaders in a couple of years explaining why this turnaround plan failed?”

Sir Adrian answered:

“We are the new kids on the block here….. We will not quit until the job is done, but it is not realistic to say there will be no changes in the team over five years.”

Barry Gardiner MP : “you are behind in both AMP7 and AMP8, you are incurring additional penalties”

The Thames team also faced some searching questions on Thames request for a deferral of its challenge to Ofwat’s Final Determination decision which is currently with the CMA, delays to its AMP7 and AMP8 investment programmes and work on the Environment Agency’s WINEP.

Barry Gardiner MP commented:

“Given AMP8 is at least two times the capital work of AMP7 and you have made no attempt to source the additional contractors that you will need, this means you have only re-engaged the existing contractors. This means your ability to press on with AMP8 is constrained, and in this first year of AMP8, you will probably only just be completing AMP7…your problem is that because you are behind in both AMP7 and AMP8, you are incurring additional penalties….. That means that it is going to become even more expensive to get the capital in and persuade investors to come in because they see that the further you fall behind, the more problems you have with penalties.”

Chris Weston agreed, saying:

“The final determination was about £20 billion. We felt that we needed to spend a lot more than that, getting on towards £24 billion, and that our performance would not be what was demanded by our regulator. That leads to the penalties increasing in AMP8 as you suggested, and that is an issue for incoming shareholders and our creditors.”

“Forward look is that it gets even worse in AMP 8”

Separately during the course of the hearing, CFO Steve Buck informed the Committee that going from AMP 6, the over-investment penalties, “in AMP 7 the over-investment and the penalties got bigger, and our forward look is that it gets even worse in AMP 8.”

Saying that the revised regulatory business plan Thames is developing requires a reduction in penalties from Ofwat, Barry Gardiner asked if Ofwat refused to reduce those penalties, whether the equity investment was “still on the table from KKR.”

If not, he continued, would it then “be too late to go back to the other potential investors that you have excluded from the process, or would it result in a special administration regime?”

Chris Weston replied: “It is a very fluid situation, but those are both possibilities.”

KKR tells Thames: “We are only going to do this if we are the only person in the field”

Barry Gardiner’s continued questioning about how Thames had handled the bidding process and its appointment of KKR as the only preferred bidder at an early stage in the process culminated with the following reply from Sir Adrian:

“This was part of a long-running process that eventually looked at six bids. Two of those bids fell out of contention pretty quickly, so we were left with four bids. We conducted a detailed evaluation of all those bids, and I can tell you that the KKR bid was—by far and away—the best. Technically, financially, in terms of the commitment to provide equity, it was ahead. So, conscious of the need to create a disciplined process towards completion, we chose KKR.”

However, he went on to acknowledge it was “true that KKR said, “We are only going to do this if we are the only person in the field,” and we agreed with that because we could not have handled more than one.”

Emergency funding - “we were in a beggars cannot be choosers situation”

Commenting on the £3 billion loan for emergency funding and the alternative proposal put forward by Thames Class A and Class B creditors considered in the High Court and the Court of Appeal, Sir Adrian Montague said:

“We have had very, very tight liquidity at a number of points over the last nine months. In October .. we had about five weeks’ liquidity at that time….Having five weeks’ liquidity is a nightmare….We were concerned that we might run out of liquidity in December unless we pressed on with the As’ offer….. we were in a beggars cannot be choosers situation.”

Special Administration Regime: “We think that suppliers would wonder how long they wanted to continue working for Thames”

Asked about the impact a Special Administration Regime would have on Thames Water’s operations and on senior staff, Sir Adrian said:

“A SAR would make life extremely difficult for everyone. We think that the suppliers would wonder how long they wanted to continue working for Thames because obviously their future would be in doubt, and the same would be true of the senior staff.”

Further on in the discussion Chris Weston told the Committee that the creditors and KKR are “pulling together a business plan” which includes the turnaround of Thames, largely based on management’s plan, which would be complete by the end of May.

During June there would then be discussions with Ofwat and the EA about “any flexibility in the final determination so that KKR and the creditors can understand that.”

That would inform the shape of the balance sheet, the extent of the write-off and the returns that they will get - the process is due to run until the end of June.

If agreed between the creditors and KKR, the process would then require a second restructuring plan which would have to go through the courts and will not happen until the autumn. “So the deal is not likely to complete until after that”, he explained.

Chris Weston: “some relief from regulatory environment...is an absolute imperative for Thames otherwise we will not be invested in”

He went on to say:

“I have had discussions with David Black at Ofwat about the absolute need for restructuring the balance sheet. It also goes to the regulatory regime that we operate in... discussing with the regulator the concept of a turnaround regime that might provide some relief from the normal regulatory environment while a company recovers its operations is an absolute imperative for Thames, otherwise we will not be invested in.”

Barry Gardiner MP suggested to Chris Weston:

“What you actually mean by a turnaround regime...is effectively that you manage to persuade Ofwat not to require the payments of ODI penalties.”

Saying that he “might characterise it slightly differently,” Chris Weston replied:

“I would argue we need to recognise the reality of Thames and other water companies as entities and where they are in their cost base and operating performance. I believe there is no point in continually penalising someone if it is going to exacerbate the situation. It is in everyone’s interest that we restructure the balance sheet and continue to improve the performance of Thames Water. Although we might not be meeting Ofwat’s targets, we are generally improving performance year on year. We need to recognise that and then re-set things to allow the company to continue to recover.”

The MP replied that if Thames Water was going to become a viable and investable proposition, it either had to stop doing the things that are incurring the penalties, which are making the cost of capital so much higher, or had to get Ofwat to allow it to make the investment up front so it was not incurring the penalty.

Chris Weston told the Committee that Thames had to be in a situation where it could attract investment from international investors who had a choice to invest not only in the water industry but other utility industries, and elsewhere in the world.

“We have to create the conditions that give them the confidence that they can earn a return when they invest in Thames Water ...they are not going to do that if they think that there will be penalties that detract from it”, he added.

Winding up the hearing, Chair Alastair Michael said that the evidence the Commitee had received from Thames and other witnesses would form its submission to the Government’s Independent Water Commission on reforming the water sector and that it was for Sir John Cunliffe to “come up with solutions about how to fix this.”