EFRA Committee raises concern over Thames Water KKR bid

The Environment, Food and Rural Affairs (EFRA) Committee held another evidence session on 13 May, this time with Thames Water’s chief executive Chris Weston, chief financial officer Steve Buck and chair Sir Adrian Montague. It was, at times, a heated discussion after which chair of the committee Alistair Carmichael issued a statement: “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.”

The MPs were keen to question Thames on its decision to restrict the due diligence process to a single bidder, KKR – which management hopes will agree to inject around £5bn of equity into the utility. Sir Adrian admitted that the company had insufficient bandwidth to proceed work with two bidders so was proceeding just with one.

The committee also expressed concern that the Thames board, having effectively no current owners, had selected KKR because it was offering the most favourable restructuring terms to the debtors. The A creditors are the largest group of lenders. There were also questions about the incentives offered by KKR to retain the current senior management team and whether that influenced the board’s choice.

The committee pressed Thames on the cost of the £3bn, high interest loan agreed earlier this year when cheaper options seemed available, to which the chairman responded that this was down to the precarious lack of cash available to fund the company’s operations and planned investment. A rapid solution had been required and other proposals were less well developed, he said.

There was much discussion of Thames’ request for special treatment by Ofwat through an agreed turnaround regime. This might mean an amelioration of Outcome Delivery Incentive penalties, which management admitted could be as high as £900m, with additional Environment Agency fines likely. By withdrawing its PR24 redetermination request from the Competition and Markets Authority (CMA), Thames hopes to negotiate with Ofwat to obtain a more palatable investment case with fewer penalties, in order to attract new equity. Then it could invest to improve its performance. Buck said that the company aims to reduce its gearing, currently at 88%, down to a 60-65% range, to regain investment credit status.

Thames has indicated that an agreement with KKR could be in place by the end of June. Court approval would be needed for the new restructuring plan. If agreed, this would be timetabled for the autumn.

However, if Thames fails to reach agreement with KKR, it will likely resume the CMA appeal process. If debtors then refuse to take part in any potential alternative debt for equity swap solution, Thames would likely enter the special administration regime (SAR). Weston observed that in the SAR, Thames’ pensioners, both current and future, would be negatively affected. There could be a reduction in pension payments of around 10% across the board, as the scheme would have to go into the government’s Pension Protection Fund. Currently the company is providing top up funding through the £3bn loan facility.

The EFRA Committee said that the session with Thames had helped to inform its own representations to the Independent Water Commission.