Correspondence released by the House of Commons Environment Food and Rural Affairs Committee yesterday evening has raised even more questions for the Chair and CEO of Thames Water to answer about the water company’s financial affairs – and the Committee has now further extended its questions about their recent evidence to Environment Secretary Steve Reed and Ofwat Chief Executive David Black.

The latest correspondence follows on from the recent exchange of letters between Rt. Hon. Alistair Carmichael MP Chair of the EFRA Committee and Thames Water Chair Sir Adrian Montague and CEO Chris Weston seeking further clarification of the information they provided when they appeared before the Committee in person on 13 May in an uncomfortable session as part of its inquiry into the water sector.

The Committee has now returned to the attack and further intensified its questioning following individual letters sent by the water company bosses on 30 May (prior to KKR’s withdrawal from its proposed investment) which attempted to address its earlier concerns.

Writing to the Committee Chair, Sir Alistair said he was “very sorry” that his letter of 23rd May had not provided “the clarification that (he) had intended.”

“Seeking to convey that I inadvertently used inaccurate words in heat of the moment”

Photo: Thames Water Chair Sir Adrian Montague

With regard to his use of the phrase “I may have misspoken” Sir Adrian explained:

“I was seeking to convey that I have inadvertently used inaccurate words in the heat of the moment. The use of “may” was not intended to equivocate or to obfuscate. It was simply my attempt to take the sting out of a disagreeable admission. For complete clarity, I did misspeak…..

“While my colleagues and I endeavoured to answer questions with absolute accuracy and clarity, I hope you will appreciate that over a two hour questioning session there are occasionally answers that are poorly expressed or even incorrect in minor detail.”

He went on to explain that his letter would also address questions the Committee had raised in their letter to Chris Weston about the Management Retention Plan (MRP), commenting:

“ I thought it was important to cover those questions about the MRP here, in a single place and for the sake of completeness.”

21 members of senior management team qualify for retention payments - "not appropriate or fair to name them"

Referring to a number of senior members of the management team whose “retention is absolutely essential to maintaining stability and running the business”, the letter says these amount to a total of 21 people and that it was not “appropriate or fair” to name them and that neither he nor Chris Weston would be recipients of any retention payment.

Commenting on the development of the plan, the letter says:

“We took advice from independent talent and reward advisers; and we consulted with the A creditors’ financial advisors and looked very carefully at management retention schemes adopted in other restructurings....and we conducted an extensive benchmarking exercise.”

The scheme Thames eventually adopted comprises three payments: 50% of base salary on 30 April, 2025; 50% on completion of the second restructuring plan or, if earlier, December 2025; and a final payment of 200% of base salary in June 2026. The plan amounts to £18.5 million in total, spread across the three separate payments over two years and shared between the 21 individuals.

First payments made in April: “Board does not intend to recover this money”

Saying that the first payments were made under the plan in April, Sir Adrian comments:

“The Board does not intend to recover this money. I can confirm that future payments have been paused….

"As part of the acquisition arrangements, we would expect a new shareholder to take a fresh view of operations and of how to attract and retain key members of staff. We will discuss the most appropriate way forward with them at the right time.”

He concludes by saying:

“I deeply regret having caused confusion through my appearance. I very much hope that this letter provides the necessary clarity.”

Chris Weston - original loan agreement included releases from liability from being sued

Photo: Thames Water Chief Executive Chris Weston

Chris Weston’s letter of 30 May addressed a number of other issues the Committee has raised, including a derivatives loss of £895.5 million.in 2022, deferral of 98 WINEP 7 schemes in AMP7, a recent water supply interruption in Reading, dividend payments, the second £1.5 billion tranche of super senior financing and an offer of alternative debt financing in September 2024.

On the purpose of the civil immunity clause in the original loan agreement, he explains that the transaction documents included “narrow and proportionate releases from liability” for individuals who were involved in the negotiation and implementation of the restructuring plan so that they could not be sued for their involvement in it. These releases extended to directors, employees and advisers of parties including the Thames Water Group, each plan creditor, and administrative parties such as trustees and paying agents.

Commenting on estimated penalties and ODIs, Chris Weston explains that on a worst case analysis basis, the company estimates that its exposure to fines resulting from EA investigations could be up to £480 million, in addition to an estimated £900 million of Outcome Delivery Incentive penalties which could be incurred by Thames Water over the course of AMP8 based on the PR24 Final Determination. These are in addition to Ofwat’s proposed fine of £104.5 million resulting from its investigation into Full to Flow Treatment.

Thames incurred £67.6 million in legal fees in relation to liquidity extension transaction

In response to the Committee’s request for details of legal fees, the letter says:

“We estimate that our legal fees for work done in connection with our liquidity extension transaction, as implemented through the interim restructuring plan at the High Court and Court of Appeal, was approximately £67.6 million.”

This includes work done by solicitors and counsel to Thames Water, as well as by solicitors and counsel to creditors to the extent Thames Water has paid these fees. The work done includes engagement with creditors and regulators on the liquidity extension transaction and restructuring plan, drafting and negotiation of all associated transaction documents and court/restructuring plan documents, the High Court and Court of Appeal processes themselves, and implementation of the liquidity extension transaction.

“Asset replacement and renewal only possible when sufficient funding is in place”

On the company’s replacement rates of assets in AMP7 – speifically mains renewal and sewer replacement, Weston writes:

“Asset replacement and renewal is only possible when sufficient funding is in place….We are concerned that Ofwat continues to provide insufficient funding for the replacement of water mains and have declined much of the investment we requested to deliver our AMP8 programme.”

Committee asks for more information on retention plan and KKR withdrawal

However, the Committee appears to regard the most recent letters from the Thames bosses as insufficient and is now asking them for further information. Writing to Sir Adrian yesterday, Committee Chair Alistair Carmichael said:

“We note your apology and your clarification on the wording used to excuse the provision of incorrect information to the Committee in oral evidence. We reserve the right, of course, to explore the veracity of your statements in future oral evidence sessions that will, in all likelihood, arise from the matters discussed below”

With regard to the MRP, the Committee has asked Sir Adrian to provide:

• a copy of “your extensive benchmarking exercise”;
• the name or names of the “talent and reward advisers” used to develop the plan and the payments made to those advisers;
• details of the advice provided by the A creditors’ financial advisors and the names of those advisors;
• the positions and salaries of the 21 individuals receiving retention payments;
• details of the arrangements put in place “to demonstrate that customers are not bearing the cost of this process”:
• the current membership and terms of reference of Thames Water’s remuneration committee;
• the dates on which the remuneration committee met to discuss the MRP and the minutes of those meetings; and
• a full copy of the MRP with “areas relating to retention payments highlighted.”
• was Defra aware of MRP payments made on 30 April

The Committee goes on to ask the Thames Chair to provide further detailed information about the MRP, including:

• the value of the payments paid on 30 April, in total and by recipient position;
• the value of the proposed payments in December 2025 and June 2026, in total and by recipient position;
• the rationale for viewing the payments as “retention payments” rather than performance-related and how Thames distinguish beteween these terms;
• the dates and full minutes of the meetings.of board meetings in which the MRP has been discussed in the last six months

With regard to the status of the MRP, Sir Adrian is also asked whether Defra was aware of the payments made on 30 April, what discussions he had had relating to their recovery with Defra and Ofwat and whether the proposal for future MRP “retention payments” had been withdrawn entirely.

KKR bid – committee seeks Sir Adrian’s “full assessment” of reasons for KKR’s withdrawal

The Committee is also seeking answers about the KKR bid and alternative options, asking Sir Adrian for his “full assessment” of the reasons for KKR’s withdrawal, the date on which he was first informed of KKR’s concerns over the proposed takeover and the dates and full minutes of Board meetings in which the takeover was discussed.

Detailed information the Committee wants to see includes the names of any potential investors who have approached Thames with alternative takeover proposals and whether he has engaged with them, details of any discussions with the regulator on the alternative plan and the dates of the discussions, together with details of any internal preparations being made ahead of a potential Special Administration Regime (SAR).

Referring to the immediate financial consequences of KKR’s withdrawal, and the ”urgent and stark circumstances”, the Committee has asked Sir Adrian for his assessment of the potential impact on Thames Water of not receiving the first instalment of the £1.5 billion tranche of funding due on 30 June, together with details of how much liquidity Thames has at present and how long it can continue to operateas a going concern without the additional funding.

The Committee Chair’s letter concludes:

“I wish to impress on you again the importance of providing accurate testimony to our Committee, and trust you are aware of our formal powers to send for persons, papers and records.”

Committee turns to Defra and Ofwat for separate comment on issues raised

Writing to Secretary of State Steve Reed yesterday, Alastair Carmichael referred to Sir Adrian Montague’s letter stating that the retention payment scheme had not been withdrawn but “paused” awaiting guidance from the regulator and that the Thames Board “did not intend to recover” the first tranche of 50% of base salary payments to 21 senior executives on 30 April.

He asked the Minister for responses to the following questions:

• What undertakings has Defra received from Thames Water about the pausing or withdrawal of the MRP?
• Whether Steve Reed was aware of the payments made on 30 April?
• Whetherr he expects Ofwat to be able to recoup the payments made to all 21 members of Thames management team?
• What is Defra’s assessment of the application of the Water (Special Measures) Act to these payments?

On the KKR withdrawal, questions he asks include:

• What assessment has Defra made of the potential impact on Thames Water of not receiving the first instalment of the second £1.5 billion tranche of the £3 billion emergency loan due on 30 June?
• What is your assessment of the liquidity currently available to Thames and how long it can continue to operate as a going concern without the additional funding?
• What preparations is your Department making to ensure Thames continues to run smoothly in the eveny of a SAR becoming neccssary?

The Committee Chair also asks the Minister to provide details of the most recent assessment of the immediate, ongoing and long term costs of placing Thames Water under a SAR and how long Defra would plan to hold the company under a SAR.

The letter concludes by asking Steve Reed for an assessment of the potential value of Thames Water to the Government if sold following a period of temporary renationalisation.

Was Ofwat aware of MRP payments made on 30 April?

Photo:Ofwat Chief Executive David Black

In a separate letter to Ofwat Chief Executive David Black yesterday, Alistair Carmichael asked for his response to questions along similar lines, including:

• What discussions has Ofwat had with Thames Water on its MRP?
• What undertakings Ofwat has received from Thames regarding the withdrawal or pausing of the MRP?
• Whether Ofwat was aware of the payments made under the MRP on 30 April?
• Whether Ofwat expects to claw back the MRP payments made and what Ofwat then expects will happen to the funds earmarked for MRP payments?
• Whether the new rule on performance-related pay is limited to executive directors or will it allow Ofwat to block payments to the 21 individuals paid under the MRP?
• When was Ofwat first made aware of KKR’s withdrawal from the bidding process?
• What potential alternative investors Ofwat is engaging with?
• What potential arrangements Ofwat is making for a potential SAR in the coming weeks or months?

He concludes both letters by asking Steve Reed and David Black to respond by 23 June “given the urgency of the situation.”