Ofwat tells MPs it would be prepared to let Thames parent company fail

The Environment, Food and Rural Affairs Committee last week questioned the efficacy of Ofwat’s new powers to control regulated water companies paying dividends to their holding companies, should the former’s financial resilience or performance for customers and the environment be a matter for concern.

The session was convened for MPs to quiz Thames Water and Ofwat, following the publication of Thames’ results and reports which questioned whether the £500m of equity invested by shareholders into Thames could in fact be classed as equity given it was raised as debt by Thames holding company, Kemble Finance.

Barry Gardiner MP asserted Thames’ shareholders had Ofwat “by the short and curlies”. He argued: “They have absolutely got you because you know that you are in a Catch-22 situation. If you do what your job is, to protect the environmental quality, to make sure that you protect the bill payer, and you impose those fines on them for dispersing that £37.5m [dividend to Kemble paid in October], the result of that, that 10% [of turnover] that you can levy against it, the fine that you can levy against it, that sends a direct message to its shareholders, ‘Don’t put any more money into this company, it’s going down the pan’. That is why you are impotent in this, isn’t it?”

Ofwat chief executive David Black refuted the suggestion, arguing parent companies had failed before and there are provisions for that eventuality. He said: “We are not saying that it is an ideal position to be in as a regulator, but if we have to take steps that does lead to the failure of the parent company, we are prepared to do so."

Elsewhere, the Thames representatives confirmed Kemble does not currently have the funds to repay £190m of debt that will be due in April, and that it is planning to request an extension from lenders. They emphasised investor appetite to provide further finance going forwards hinges on the outcome of the PR24 determination.

• Moody’s has downgraded Kemble Finance’s £400m medium term notes, due in 2026, from B2 to B3, with negative outlook. This follows Ofwat’s scrutiny of the recent dividend payment from Thames to Kemble, given Kemble relies on Thames revenues for its debt service.