Oral evidence: Reforming the water sector, HC 588
Oral evidence, 15 July 2025.
Witnesses
Chris Weston, Sir Adrian Montague, Ian Pearson.
Chair
Good morning everyone, and welcome to this session of the Environment, Food and Rural Affairs Committee. We return today to our ongoing thematic inquiry into the reforming of the water sector. We are joined again today by representatives from Thames Water. Welcome, gentlemen. For the benefit of those following our proceedings and for our own official record, please can I invite you to identify yourselves and your roles?
Chris Weston
I am the chief executive of Thames Water.
Sir Adrian Montague
I am the chairman of Thames Water.
Ian Pearson
I am an independent non-executive director and chairman of the remuneration committee.
Chair
Welcome to the Committee. It is not that long, of course, since we had Chris and Sir Adrian with us. I thought that just before we come to the detailed questioning, it might be helpful for everyone to understand the purpose of what is quite an extraordinary session. We have taken evidence from no fewer than 10 water companies. Thames is the only company that we have felt it necessary to recall in this way. Initially, this was as a consequence of Sir Adrian writing to us indicating that last time around he had misspoken putting inaccurate, and in fact probably misleading, information in front of the Committee, which came to light, we understand, as a result of an inquiry from The Guardian newspaper. Since then though, you have provided significant amounts of information, which, candidly, I am inclined to think we could have had earlier if there had been a proper commitment to transparency from the company. We have requested board minutes regarding the KKR bid, which we have still not received. There now appears to be a bit of dubiety around the actual figure spent on legal fees. It took us until 5.20 pm yesterday to receive from you a list of, as you term them, senior creditors. We note, and we may turn to this this morning in so far as we are able to, that you filed your report today with Ofwat. This is the last possible day for that to be done. Candidly, it feels to me, and I know that some colleagues share this view, that there has been quite a bit of game-playing going on here. I have to say, looking at the whole evidence that we now have available to us, it is certainly not clear to me just in whose interests you are all working. The purpose, I hope, is that by the end of today’s session we shall expect to have clarity on all the outstanding matters. If we do not have that clarity, then we reserve the right to return to it. As I have explained to you previously, as a Committee of the House of Commons we have formal powers which we have not yet invoked, but we may do so if that is necessary. Chris, as the chief executive, the culture of the company comes right from the top.
Chris Weston
It does.
Chair
Why is transparency so difficult for Thames Water?
Sir Adrian Montague
Could I just interject, Chair?
Chair
Please do.
Sir Adrian Montague
I would like to make an apology. As you said yourself, it is rare for a water company, or any company, to be recalled to the Committee. We regret that we have made that necessary. We have tried to be as forthcoming as we can with our disclosures. We will no doubt go into some of the reasons behind the actions we have taken, but I just wanted to say before we start that you are all busy people, and I am sorry that we are taking up your time again.
Chair
We accept the apology, but I do not think we are yet in a position where we are prepared to take things on trust from Thames. Hopefully by the time we get to lunch today, we will be in that place, but let us just see how it goes. Chris, transparency?
Chris Weston
Transparency is absolutely something that comes from the top. I recognise I am the leader of the organisation, and I set the tone from the top. I am very clear in both my actions and the direction that I give to the company that transparency is absolutely essential and that in many instances, Thames is at the forefront of transparency. We were the first water company to publish all our overflows online so everyone could see them. I am very keen that we continue to make sure everything we do is transparent.
Chair
It is not a particularly happy story this morning on overflows, is it? Your report indicates that you had too much rain leading to overflows a week before you put us all into a hosepipe ban.
Chris Weston
I know and I am sorry about that, but I am afraid that the weather is a reason, not an excuse. Last winter, before we came into this spring, we had the second wettest winter on record. There were some months, such as last September, when the rainfall was more than double the normal monthly rainfall. Our system, I am afraid, was never intended to deal with that. We are taking huge steps to improve our position around pollutions. We are cleaning the network more than we ever have and we are investing more than we ever have in our sewage treatment works, but it is going to take a while. The work that KKR has done backs up the view that to turn around and transform this company is going to take between five and 10 years, maybe a bit more.
Chair
To go back to the position in May, we discussed your decision to proceed with KKR as a sole bidder. KKR has since left the playing field at the beginning of June, and you now have an even shorter time frame. How do you feel now about the decision that you made to proceed with KKR as a sole bidder?
Sir Adrian Montague
Perhaps I should take that. First, if I may, I will explain how we have managed the process of looking at bids.
Chair
If you can keep it a tight explanation, please.
Sir Adrian Montague
As is common in takeover situations, we created a special committee of the board. It has the unlovely acronym of ERSCO: the equity raise sub-committee. It was this committee that reviewed all the bids. At an earlier stage, long before KKR’s withdrawal, we looked at all the propositions that were on the table. We felt that KKR’s was by far the strongest. There were significant difficulties with all the others, so we decided to go with KKR. It is fair to say that we did that in the face of some unhappiness on the part of Ofwat. Ofwat was not happy that we were going to a single bidder as quickly as possible.
Chair
Not just Ofwat; CKI, one of the bodies that you kicked out, felt that it was badly misrepresented and treated.
Sir Adrian Montague
I do not think CKI has been misrepresented, and I do not think it was badly treated.
Chair
It was not happy either.
Sir Adrian Montague
That may be true, but we went to KKR because it had by far the strongest bid and because it said that it wished to proceed on the basis that it was the sole preferred bidder. I know you have written to KKR. I do not know whether you had a reply, but it will account for that in its own words. We felt that, in view of the fact that KKR was the strongest bidder, it was right to proceed in that way.
Chair
Now KKR has gone, how do you view the position?
Sir Adrian Montague
We are actually in a reasonably strong position.
Chair
Let us just get this right. You had two bids. You took the more expensive one at the expense of the cheaper one. The more expensive one has gone and now you are left with a more expensive option still, and that puts you in a stronger position?
Sir Adrian Montague
We had a number of bids from industry players, including KKR and CKI, which totalled five or six bids, and then we always had the creditors providing competition to those bidders. The creditors are still advancing; they are in good shape. The proposition has been strengthened because KKR has shared its information with us and the creditors. We believe that the bid coming from creditors is technically very strong and they are exploring that with Ofwat. We hope that they will reach a conclusion with Ofwat very soon. It will then be necessary to put that into a financial construct of how we reconstruct the capital of the company, but we are in reasonable shape.
Ian Pearson
As a member of the equity raise sub-committee, I would just like to make the point that it really was a very clear distance between KKR and the second and third, and it was made very clear to us that KKR would not proceed any further unless it proceeded on an exclusive basis. Frankly, we decided as a committee that although we wanted to maintain competitive tension, actually taking through the second and third bidders when they were so distant would not have been in the best interests of the company. We knew that we had a creditor-led proposal as well to keep the competitive tension that was required in the process.
Chair
Just to be clear, CKI did then want to come back in, but you deemed that to be unprogressable. Is that right?
Ian Pearson
The situation was basically that KKR said it would only—
Chair
CKI is not a fly-by-night organisation; it is one of the world’s biggest infrastructure companies and you are saying that it came up with something that was unprogressable.
Ian Pearson
CKI came up with a bid that was not as good as the KKR bid by quite a long way. Then KKR demanded exclusivity if it was going to go further with the bid. Ofwat would have liked us to carry on with KKR and CKI; we would have liked that as well, but the simple fact was it was not possible because KKR would not proceed on that basis.
Chair
So KKR said jump, and you just said, how high?
Ian Pearson
No, we had to make a choice: do we rule out KKR and proceed with bids that are demonstrably inferior and therefore not likely to be in the best interest of the company, or do we agree to the exclusivity and proceed with KKR?
Chair
We have asked you for the board minutes in relation to this, and so far they have not been provided. So effectively, you are asking us to take this on trust from you. You will understand the reasons why we are reluctant to do so. Ian, do you want to tell us what it was that was so strong about the KKR bid, which surely makes it all the more inexplicable that it would have walked away?
Ian Pearson
KKR produced a very strong, detailed proposal. The economics of it were more compelling to the board and certainly to the ERSCO. In the fullness of time, when we are not in the middle of a live transaction, I am sure that we would be very happy to provide further information. When we looked at the detail of the proposals that were produced by the bidders, there was very clearly only one winner.
Chair
You have lost your competitive tension now. KKR has gone. The preferred creditors—the class A bondholders—are the only show in town now. They know everything and everybody else knows everything so where is the problem with releasing the information? Who loses?
Sir Adrian Montague
Can I try to explain? There are essentially—
Chair
Sir Adrian, perhaps you might also come back to the question I put to Mr Pearson which was what was so strong about the KKR bid? So far, we have only heard that it looked good and was detailed.
Sir Adrian Montague
No, it was better than that. As is usual in these circumstances, when you appoint a preferred bidder, there follows a period of due diligence which allows the bidder to make its propositions more concrete and produce a final offer. There was 10 weeks of due diligence. KKR deployed an extraordinary number of resources; there were times when we had more than 100 people in our data room. KKR learned everything there was to learn about the business and produced a plan which, in the words of one of our commentators, was “world-class.” It understood the problems of the company and what needed to be done to resolve them. That is why its bid was exceptional. When it withdrew, although we were not given many reasons, it was confirmed to us that KKR saw no financial or operational reason why it should not have been able to continue. You have asked KKR yourselves, according to the letter that you published, to give its own account of the reasons for withdrawing. I would not want to take words out of its mouth, but there was something in there about the level of expectation and its worries as to whether it would be able to meet those expectations in time. All we were told on that fateful evening of 2 June was that it was not in a position to proceed, which is where it stands.
Chair
There have been other offers and notifications of entries. Who makes the decisions in relation to the various bidders? Is it the board?
Sir Adrian Montague
Ultimately it is the board; but as I said, we have established this equity raise sub-committee of the board. We did that to erect a ring of secrecy around these propositions because they have commercial information of great value to all the competitors.
Chair
Who are the people on that board? We have heard you are a member and Mr Pearson is a member.
Sir Adrian Montague
Mr Land, who is the senior independent director, is a member; Ms Lynn is a member; there are three observers, two of whom—Mr de Brunner and Mr Robson—are experts on restructuring; and Chris Weston is invited from time to time. The proposition here is that this is a matter for the non-executive contingent of the board, but management is affected by these propositions so Chris attends when we invite him.
Ian Pearson
Of course, we have our professional advisers who attend these meetings as well; they advise us on the bids and their views on the economics of them.
Chair
Which organisations do the various participants represent then?
Sir Adrian Montague
I am sorry, could you repeat that?
Chair
Who is behind this?
Sir Adrian Montague
Behind the committee?
Chair
Yes.
Sir Adrian Montague
It is the board that takes all the ultimate decisions.
Chair
We have made the formal request for the board minutes in relation to this. Later, as a Committee we will discuss what view and further steps we wish to take. To be clear, in the event that we invoke the formal powers that Parliament has given us, not providing these minutes will be a contempt of Parliament. Is that understood?
Sir Adrian Montague
We understand and respect the Committee’s powers. However perhaps I will take an instant though to reiterate why we think it is inappropriate at this juncture to give these minutes. First, they contain confidential information concerning all the bidders and their bids and we are subject to confidentiality undertakings with regard to that information. Secondly, we are also subject to market abuse regulations, which control the dissemination of material non-public information. Those are formal constraints. The most important point is the one that Ofwat has referred to in its letter: these are discussions at a very sensitive stage. There will come a time when all these things are subject to review. Once we have a complete deal, we have to secure the court’s approval of it of course, but at the moment there is lots of ebb and flow, and it will be really counterproductive to release these documents. We hope that the Committee will understand and respect our position.
Chair
If that is the case, what was the purpose in you offering me, as Chair of the Committee, a private briefing? What were you going to tell me? Let me just be quite clear: there are no circumstances in which I, as Chair of this Committee, will take a briefing in private or that does not include the other members of this Committee. I am the Chair, but we are all equal. You will be familiar with the expression primus inter pares. That is my role here. So what were you going to tell me in private?
Sir Adrian Montague
I was going to tell you information that I thought you would share with the Committee. I am not seeking to marginalise the Committee in any respect, but I thought that it would be easier for us to have a more detailed discussion away from cameras and the public forum.
Chair
I am afraid that sounds like a bit more game-playing to my mind.
Sir Adrian Montague
I am sorry.
Chair
However, we have a lot to get through. I am going to invite Charlie to lead us in the questioning of the collapse of the KKR bid.
Charlie Dewhirst
Sir Adrian, you just implied to the Chair that you were given no explanation as to why KKR withdrew the deal. There was obviously plenty of speculation at the time, spooked by Government rhetoric and concerned about Thames assets being worse than they first thought them to be. Are we seriously expected to believe that you were given no explanation other than that it was withdrawing the bid?
Sir Adrian Montague
Yes, I am afraid that is exactly what happened.
Charlie Dewhirst
Did KKR submit a bid to Ofwat on 30 May?
Sir Adrian Montague
We had the best part of 1,000 pages from KKR and we had the best part of 1,000 pages from the creditor. It is a very substantial piece of work. It submitted a turnaround plan which looked at the commercial and operating characteristics of what it was trying to achieve. What was not submitted was the financial elements of the bid. It said it could not do that because it had not achieved the full endorsement of its investment committee.
Charlie Dewhirst
So in those 48 hours, it decided to pull the bid having submitted most of it?
Sir Adrian Montague
Having submitted all but the financial details.
Charlie Dewhirst
There was nothing else that happened in that period of time that would have triggered it?
Sir Adrian Montague
You must ask KKR that. I do not believe there was.
Charlie Dewhirst
On the day that it pulled out, the class A creditors had a rival bid ready to go; an oven-ready deal if you like. Somewhat fortuitous, would you not say?
Sir Adrian Montague
No, the creditors had always been there. Perhaps we need to go back and think about the creditors’ position. They are secured lenders to the company. The company is in default, and we are kept alive by the creditors drip-feeding liquidity into the company. They have a great deal of contractual control over what happens at the company. They do not take the decisions; the board takes the decisions, but they do have a great deal of control. They saw it as helpful and relevant to their position to create an alternative proposition. That is what happened. At that stage, I do not think it was, if you like, oven-ready in the way that KKR’s bid was oven-ready, but it was very advanced.
Charlie Dewhirst
Is there not some sort of conflict here where you have a KKR bid on the table, and yet the people who are ultimately making this decision are also waiting in the wings to pounce?
Sir Adrian Montague
As I said, the people who make the decision are the board. The creditors, as we discussed with the High Court in the first restructuring plan, are essentially the economic owners of the business. They are not the shareholders or the directors. It is the board that takes these decisions.
Charlie Dewhirst
You can understand that from the outside looking in it seems to be a conflict.
Sir Adrian Montague
I do not think it is a conflict. There are multiple interests and that is what happens when you get into one of these restructurings because the creditors are sort of in transit. They know that when it comes to the restructuring plan there are going to be huge write-offs. I think they have quoted a figure of £10 billion or so, which is an enormous loss for institutions that represent savers. We must not forget that all this money is actually savers’ money; it is a desperate situation for the savers. They are also going to be the people who emerge as the future owners of the company. So there is a transition, if you like, which is a better word than a conflict.
Charlie Dewhirst
Mr Weston, as the chief executive, do you have a view on the creditors?
Chris Weston
They started work quite a long time ago and have supported the company for the last year or so. They have been providing financing to the company, which has allowed us to carry on investing to meet our legal, environmental, and regulatory obligations. As Sir Adrian said, they have pulled together a comprehensive plan, demonstrated their support and understanding for the company, and put forward a detailed proposal to both the company and Ofwat. So I am entirely comfortable with the operational plan that I am seeing from them: it makes an awful lot of sense, and it addresses what needs to be addressed in Thames to turn the company around.
Henry Tufnell
Can I just come back to the point about the minutes in terms of releasing them to the Committee? Is it the case that what is going on here is that you are refusing to release the minutes because they demonstrate that there is a plan that the class A creditors have a preferential first dibs on Thames Water?
Sir Adrian Montague
I do not think that is the case at all—
Henry Tufnell
And the way that you have set up this bidding process means that they effectively get preferential treatment?
Sir Adrian Montague
Can I tell you the history of the bidding process because this is quite important in terms of context? It started last summer. On our behalf, Rothschild talked to more than 50 institutions around the world because it thought this was an unusual opportunity for brave bidders. You have to be a brave bidder to come to Thames, but it is an unusual opportunity. In December, we had five responses, and in February, we had a sixth. That was the limit of the responses we had from the market, but all those responses were taken forward and adjudicated. We concluded that KKR was the best. KKR was also acceptable to the creditors so had KKR taken this all the way, we would have found ourselves with KKR as a major shareholder and the creditors as a result of a debt-for-equity swap—
Henry Tufnell
Why are you not being transparent about that process? That is the key thing here, is it not? Ultimately, we are sitting here responsible for taxpayers’ money, and we are responsible for customers in respect of Thames Water. We sit here to represent our constituents. The onus is effectively that your buck stops with the creditors. Effectively, the argument is that you have created this situation whereby the creditors win at any price, and you are not willing to share any documentation as to the nature of the process that you have gone into in respect of the KKR bid that has collapsed.
Sir Adrian Montague
We would say that our responsibilities are first and foremost to the customers and the environment. Creditors are obviously in that rank of people for whom we have responsibility, but we are also trying to save this company. We may come back to special administration in due course. I joined this company two years ago in the wake of the resignation of the chairman and chief executive. We had a crisis then and have been living in crisis mode ever since, but we are trying to refinance this company and preserve it from a special administration, which would be very bad for everybody. Perhaps we will come back to that.
Chris Weston
Can I just add to that? Part of what we have to do to turn the company around and transform it is to restructure the balance sheet and reduce the gearing and the level of debt that is carried by the company. There is a formal process that we are following. We have had one restructuring plan, which was overseen by the courts, and we will need to have another restructuring plan overseen by the courts to restructure the balance sheet. However, to do that, 75% of the creditors must agree to the restructuring. They have to have a role in what we are doing to turn around the whole company and get it back on to a firmer financial foundation so we can then go on and turn around the operations.
Helena Dollimore
I just want to come back to the collapse of the KKR bid. Adrian, what day did you become aware that it was pulling out?
Sir Adrian Montague
In the late afternoon on 29 June.[1]
Helena Dollimore
Friday?
Sir Adrian Montague
Thursday evening.
Helena Dollimore
Thursday evening. Was that a phone call?
Sir Adrian Montague
I had a phone call from Rothschild, our financial advisers.
Helena Dollimore
It was a bid that you had moved heaven and earth to pave the way for, so how did you feel in that moment? You had let it proceed on an exclusive basis, and you have found yourself in an extremely uncomfortable position in front of this Committee. How did you feel when KKR pulled out?
Sir Adrian Montague
It was clearly a great disappointment, but these things happen in life. No bid is sure until you have signed on the dotted line. This is a situation which has enormous challenges.
Helena Dollimore
You feel no angst towards the company?
Sir Adrian Montague
Of course not.
Helena Dollimore
What do you judge of its assessment? KKR’s official reasoning that it gave us is that it was worried about the political landscape in which it was entering in terms of Thames Water, but nothing has really changed in the political landscape between the general election last July and KKR pulling out. The Water (Special Measures) Bill is already on the statute books and the Government made clear commitments in their manifesto. It does not really stack up, does it?
Sir Adrian Montague
You will have to ask KKR these questions, not me. I can tell you that all we were told on that evening of 29 May was that KKR had not been able to achieve the approval of its investment committee and therefore was unable to proceed. No more colour was provided to us. You may have been provided with more colour than we had, but I do not know that for certain.
Chair
Can I just check I heard you correctly there? Did you say, “Our responsibilities to the environment”? I ask because one of the companies listed in the letter that you sent us yesterday at 5.20 pm is Elliott Management, which bought over BP and made it move out of renewables. Are you optimistic that it is going to treat Thames differently?
Sir Adrian Montague
There is a huge difference between what Elliott did in relation to BP, where I am unaware of the circumstances.
Chair
Have you explored this with Elliott?
Sir Adrian Montague
No; we are unaware of the circumstances. Thames has defined environmental obligations, but we are struggling to fulfil them. One of the purposes of the turnaround plan is to put us in a better shape to fulfil them.
Chair
It is widely reported that the class A creditors—senior creditors—will expect to be released from fines and environmental obligations if they are successful.
Sir Adrian Montague
That is what has been reported. I believe that the discussions they are having with Ofwat, which we are party to but not an integral part of, are aimed at trying to identify how we can reprofile expenditure in order to move back to compliance as quickly as possible.
Chair
I have one final question before I bring in colleagues again. Ultimate controller is a term of art used by Ofwat. Who is the ultimate controller of Thames Water today?
Sir Adrian Montague
The ultimate controller, bizarrely, is still the original shareholders.
Chair
Who are no longer part of the picture?
Sir Adrian Montague
They are not taking any active part, but they still own the shares in Kemble Water Finance Limited. Those shares are now under the management of Kemble’s lenders.
Chair
You have no ultimate controller?
Sir Adrian Montague
We have an ultimate controller, but it is not very active. There is an ultimate controller.
Chair
It is not that they are not very active; they do not exist anymore. I can do the whole Monty Python dead parrots sketch for you if you want, but that is a controller that has ceased to be.
Sir Adrian Montague
I accept that. We have no day-to-day contact with them. We have intermittent contact with them, but no day-to-day contact.
Andrew Pakes
I want to follow up on Helena’s point about this now infamous telephone call. So you received this call, and you put it down. Your answer seems to be that you felt no emotion or rancour; you simply put the phone down as though someone was telling you they are coming to clean your windows at 10 am as opposed to 9 am. It was a simple oops moment in life. Are you seriously expecting us to believe that as a board, you have had no conversation about what KKR’s reasons were? You can keep telling us we should ask KKR, and we can, but you are the senior leadership of a major organisation which in your own words is in crisis. Are you seriously telling us you have not had a conversation or done any impact assessment or assessment from your own viewpoint? My question is, in your words, what do you think went wrong?
Sir Adrian Montague
KKR failed to get its investment committee approval because it was concerned that public expectations of what it would achieve would not be matched by what was possible in a reasonable timeframe, so it withdrew. There has been press speculation that attributes different reasons to that. I know nothing about that. I have not had that direct conversation with KKR. I had that telephone call on the Thursday evening, and it was a disappointment. I have had a long professional career with lots of disappointments, and you do not get emotional about it. You try to take it as a fact; I took it as a fact.
Chris Weston
It did not make any difference to the day-to-day running of the company. People were still focused on their day-to-day jobs, which is absolutely what I wanted. We have since then been through the due diligence reports that were produced and provided by KKR, and we have distilled those down to areas that we think we can further improve the performance of the company. We are now building that into the plans and operations of the company.
Andrew Pakes
Do you think the public might find the responses here quite strange? Whenever we discuss bonuses or discuss decisions that the public may find strange or customers may find strange, you all turn into Sir Humphrey and talk as though you are passengers in this whole decision-making process. I find it extraordinary that you do not have any sense of urgency about solving this crisis.
Sir Adrian Montague
Urgency? Let me take you through what has been happening. Ever since I arrived, this company has been in crisis. We have had an abortive engagement with the original shareholders providing equity. We have had the draft determination and the final determination. We have had interaction with the debt markets and the creditor markets. We are thinking about a reference to the CMA. The pressure that the team is under is huge. Actually, there is no room for emotion. You put your head down and you get on with the job; that is what happens when you have a disappointment like KKR. You cannot wring your hands because you just have to move on.
Sarah Bool
I just wanted to clarify some timings because when Charlie asked earlier on, you said that KKR submitted its bid to Ofwat on 30 May, but you also said that you were aware of KKR potentially drawing out on 29 May, and then not getting the financing. Can you clarify that?
Sir Adrian Montague
I know that I had a call on the late afternoon of the 29th. I am not sure I can say from my personal knowledge when that bid was submitted. It was due to be submitted on the 30th. It may have been submitted on the 29th. I am not precisely aware of that timing.
Sarah Bool
But either way, you were aware of KKR pulling out, but simultaneously, it put a bid in, we think.
Sir Adrian Montague
I was aware that it had not been able to get its final investment committee sign-off. There was a lot of interaction over the weekend to try to persuade it to continue, and it finally withdrew later on Monday evening.
Sarah Bool
Okay. Just very quickly on that point: obviously as part of the due diligence, KKR would have been asking Thames Water a lot of questions to seek that comfort. Clearly, you could not give KKR the comfort to be able to get that financial investment sign-off. Obviously I understand about the banks. Chris, I know you said that you are working on this now, but what more can you give to investors?
Sir Adrian Montague
I wonder if Chris can describe the interactions we had with KKR leading up to its final decisions because they were intense and long-lasting.
Chris Weston
We had a 10-week due diligence with KKR which was extremely extensive and intrusive and took a huge amount of time. There were hundreds of questions going into a lot of detail about the data that the company operates on. It was very intense. From that, KKR got all the information it needed to understand the assets and operations of the company and when it pulled out said there was nothing that was found that it did not think was fixable or untoward. As a company, we came through the due diligence showing that our operations are in relatively good shape.
Sarah Bool
I will leave it there because I will come back to that a bit later.
Chair
Barry, you are going to ask about the financial timeline.
Barry Gardiner
Picking up on the business with KKR, does the fact that you were surprised on 29 May indicate that you did not sufficiently question the level of approval that KKR had received from its investment committee? Was it not a fault on your part that it was able to pull out at supposedly the last minute?
Sir Adrian Montague
No, I do not believe so. The usual process that investors such as KKR follow is that they have a preliminary investment approval that allows them to engage, conduct this due diligence process, and produce the very detailed pack they would need to secure their final approval. This final approval was shared between Europe and the United States, making it a complicated process; however, we had provided all the information needed. As Chris said, we had been told that there was no operational or financial reason why it could not pursue this.
Barry Gardiner
But it did not, which means that its investment committee refused to sign it off for another reason. We are told that this was because of the politics surrounding this, and presumably the fact that the week before the fines had been announced and there was a glare of publicity. That suggests that you had not dug sufficiently into the approvals that were received from the investment committee, but let me go on. You released your financial results to March 2025 today. You have a pre-tax loss of £1.776 billion. The liquidity is precarious, with £0.2 billion of cash and the £1.5 billion senior loan facility undrawn in March, but that requires credit waivers because of the court sanction and the appeal. So your liquidity is really pretty precarious. How is that compromising your ability to operate at an environmentally sensitive and acceptable level? What percentage of the investment required by Ofwat under PR24 have you actually managed to deliver, Mr Weston?
Chris Weston
It is not compromising our ability to invest in our assets on a day-to-day basis or our ability to plan and start projects that we have to deliver over the next five years.
Barry Gardiner
What percentage of investment required by Ofwat have you so far managed to deliver?
Chris Weston
It will be a very small percentage. I do not know the exact number. We have invested probably £300 million or £400 million so far this year, maybe a bit more, out of what needs to be invested over the next five years, which is about £22 billion. We are ramping up to do that, and it is quite normal at this stage in this regulatory period that the investment number and percentage will be very low.
Barry Gardiner
So at the moment you are not keeping pace with PR24 and Ofwat’s requirements?
Chris Weston
I would not agree with that.
Barry Gardiner
You would not agree with that? Okay. Originally, you said you were targeting the new equity investment injection to be delivered immediately after the announcement of the final determination of PR24, then it was after the court hearing on the restructuring plan, and then it was at the end of June. Here we are in July now and there is still no sign of a viable investment plan. It is the customers who are suffering from a failing service. Why have you got it so wrong for so long?
Chris Weston
I do not know that we have it wrong. The company continues—
Barry Gardiner
You made statements to this Committee and publicly that these would be the points at which the investment plan would come into effect. All your statements so far seem to have been wrong because it has not come into effect. You are now extending it to the end of the year by saying that it might be in place by that period. What you have said so far has been wrong, so I suppose I am asking why this Committee should have any faith that by the end of the year, it will be possible to do what has so far been impossible to do?
Chris Weston
First, the operations of the company continue as normal providing the service that we provide, and we continue to invest, which is a very important starting point. Beyond that, when you look at the recapitalisation of the balance sheet, we absolutely had to have an FD, which landed on 19 December last year, because it created certainty for potential investors around their investment in Thames Water. At the same time as we were running that equity process, we also had to run a restructuring process overseen by the courts that extended our liquidity and allowed us to bring in a super-senior facility that created a firmer financial foundation to give us liquidity if we draw on the first £1.5 billion to the end of this year, which is December. I can talk about how we are drawing on that facility, but that foundation then allows a potential equity partner—we have already discussed KKR—or the creditors to come up with a creditor-led plan. They have been through due diligence to pull together that operational plan and are discussing with Ofwat the regulatory support required to make Thames investable and turn it around.
Barry Gardiner
You know full well that the initial negotiation of that £3 billion was that it would come in two tranches. You were expecting to draw down the second £1.5 billion in June which was last month, but you have now said that the first tranche can actually last you until December. Why were those calculations so far out? Did the creditors create an artificial deadline for the second tranche in order to create a sense of urgency for a takeover proposal?
Chris Weston
They have certainly pushed all parties to create a sense of urgency to try to reach an agreement, which was what the June release was all about.
Barry Gardiner
My question is, was it an artificial deadline?
Chris Weston
No, it is not an artificially generated deadline: it is driven by the financing that they have put in place.
Barry Gardiner
So were you telling the truth to this Committee when you said that you expected to draw down the second tranche of that loan facility in June?
Chris Weston
That was the best information we had at the time, yes.
Barry Gardiner
It was wrong.
Chris Weston
It is not always easy to precisely forecast cash flows.
Barry Gardiner
It might be if, as you say, the business has not suffered any interruption of its normal process business. You have been able, according to you, to meet the Ofwat requirements of PR24 and continue that investment programme in the normal way. So actually, given that you said everything is tickety-boo, you have had no unseen events that would have made those projections of drawing down the £1.5 billion out of sync, but it is out of sync, so why?
Chris Weston
I do not want to give the impression everything is tickety-boo. The company is extremely stressed and is within very difficult circumstances. I have said in the past to the Committee that our finance function was not the most efficient or proficient, which left us wanting in some areas. I admit that our understanding of cash flows was not what it needed to be. I am relieved that the financing we put in place is lasting longer than we expected because we are spending it as we need to spend it and are probably a bit more efficient than we thought. Unfortunately, our headcount is a little lower than we want it to be, but that all leads to the uncertainty of the reality of running a company and predicting what cash flows look like.
Barry Gardiner
Adrian, the fact is that you are no longer in control of the process. You have ceded that control to your super-senior creditors. The equity injection is now in the hands of the bondholders. Let us examine those bondholders: what experience do they have of turning around the performance of a utility company? You are a year behind on AMP7 and are presumably incurring penalties on AMP8. Your lead investor appears to be Silver Point Capital which is a short-term debt investor trying to salvage its decision to buy Thames bonds but has no operational management expertise and no commitment to stay for however long it takes to turn the company around.
Chair
We are going to come to some of this later, so could you maybe be concise?
Barry Gardiner
Should we actually be talking to Tim Lavelle at Silver Point rather than you?
Sir Adrian Montague
I am sure he would be delighted to come and account for himself. The senior creditors are over 100 in number. Many of them are household names. They are insurance companies, pension funds, and banks, and there are special situation investors such as the ones that you have just referred to. There is a mass of creditors that have an interest in seeing Thames Water recover and survive. The majority of those investors are unrestricted. They can trade their bonds because they are not party to any inside information. There is a group of them that we identified in the note I sent to the Chairman last night. Incidentally, it is worth saying that the only reason that note was late was that each of the investors had to go through a clearance procedure before it was willing to have its name advertised to the Committee. We had hoped to do it on Friday. They have brought together this representative group of institutions, which are the people with whom we interface in financial discussions regarding the future of the company. They are represented by advisers, and day-to-day we work with the advisers rather than with this group of 15 institutions.
Barry Gardiner
That is fascinating, but it is not really an answer to my question. You said that KKR felt that it could not deliver what the public’s expectations were in a reasonable turnaround time. Yet you have told this Committee that KKR’s bid was a world-class bid with the expertise to do just that. You now seem to be favouring a bid which is with companies such as the Chair has outlined, and Silver Point, that have no operational experience whatsoever, but are known to operate in the credit markets in such a way that they buy up, take a haircut, and walk away with the killing.
Chair
Barry, can we keep this tight because we are straying into stuff that we are going to come to later, given the chance?
Barry Gardiner
Are they going to do it if KKR could not?
Sir Adrian Montague
KKR could and would have done, but for its inability to achieve the approval of the investment committee. We have talked a little about what I understand the reasons were but—
Barry Gardiner
It said it could not be delivered in a reasonable timeframe and what they believe the public expectation was. So my question to you is, how is it that you believe that this group with no operational expertise can?
Sir Adrian Montague
I must take issue with you on the fact that they have no operational expertise. These are perhaps not the secondary debt traders, but you have many very respected investors in infrastructure among these creditors. You can shake your head at me, Mr Gardiner, but it is none the less true.
Chris Weston
The creditors’ estimate for the time it will take to turn the company around is 10 to 15 years, which is similar to KKR’s timeframe.
Chair
I am going to move on. Sarah?
Sarah Bool
Just to be clear, in the vein of transparency, I want to look again at these other bidders’ offers. Obviously, you say that the proposals from KKR and Castle Water were not progressable, but I want to understand what it was that was not progressable.
Sir Adrian Montague
The way to answer that is just to take you through the sort of decision matrix that we have. We are essentially looking for four things. First, a detailed operational plan based on a thorough due diligence process, which involves really getting to know the company, understanding the difficulties the company is going through, and identifying a way through it. Secondly, this company needs equity desperately badly, so a bidder must provide the right sort of equity. We have a long period before all this takes root, so we need an interim financing plan. At the moment, we are living off the super-senior funding that the senior creditors put in place. Thirdly, we need an overall plan to get the company back to investment grade. At the moment, we are living on emergency facilities provided by the creditors. A long time ago, before Thames went into these difficulties, it was a highly regarded and sought-after issue of debt in capital markets. That was reflected in strong investment-grade ratings. We have lost those investment-grade ratings because of all the difficulties. We need to regain them and get back into the long-term debt markets. Finally, we have to have the support of the regulators and all our stakeholders. Those are the criteria that we have used to assess these bids.
Sarah Bool
Where did those mainly fail? Which of those issues were the problem because I am sure the regulators might have been on side. I understand the future investment. Where was the weakness on the others? If KKR could, why could others not?
Ian Pearson
I am sure we could have progressed CKI as a bidder. As Mr Carmichael rightly said, CKI is a very well-recognised and reputable operator.
Chair
There are other reasons why we might not want to, but what was it on the faces of the bid?
Ian Pearson
On the basis of the bid, the fact was that KKR’s bid was superior and it wanted exclusivity. So it was not possible to progress CKR’s bid any further whilst still—
Sarah Bool
I appreciate that because I completely understand that need for exclusivity and that that is what KKR would want. They want that 10-week period; it is quite common in legal transactions. I have seen that before. What I do not quite understand is once that period ended, why did you not just reopen it and give the other companies the opportunity to at least improve their bid?
Sir Adrian Montague
We had contact with three bidders, two existing bidders and one new bidder. The existing bidders that were part of the adjudication we carried out in March were Castle Water and CKI. The difficulty is capturing these assessments in a couple of sentences. In CKI’s case, it had not done a great amount of detailed due diligence. It is quite true that it is a recognised infrastructure investor in the UK. Indeed, it has an investment in another water company; it knows the sector, but it had not been through a detailed due diligence phase.
Sarah Bool
Is that because they were not allowed to due to the exclusivity?
Sir Adrian Montague
No. It was treated in exactly the same way as KKR leading up to the adjudication in March. It had all the opportunity it could possibly have wanted to do the work. Its financial projections were less favourable than KKR’s, which was much the same in the case of Castle Water. At that stage, Castle Water was not fully funded, but would tell you now that it is, but it has very little operational capability in water. It is not just the financial proposition you need to look at. It is the overall appreciation of who is going to provide the best bid. In our case, it was clearly KKR.
Sarah Bool
Just to understand, you say it does not have operational capacity in water, but CKI owns 75% of Northumbrian Water. What do you mean by that compared to the creditors?
Sir Adrian Montague
I said that in relation to Castle Water.
Sarah Bool
Sorry, fine. If there really was a true exclusivity period, then obviously, as Charlie mentioned, the creditors were primed and ready. So was it actually a true exclusivity period if they were primed and ready?
Sir Adrian Montague
The way that we have described it and the way that KKR describes it is that it was the preferred bidder.
Sarah Bool
It would have been an exclusivity agreement signed thing.
Sir Adrian Montague
At around the time of the adjudication, there was lots of talk about exclusivity but then the point became apparent that we also had the creditors sitting in the wings, and they thought they were the preferred bidder rather than exclusivity.
Chris Weston
Their exclusivity agreement had a carve-out for the creditors. They expected them to sit alongside them and do their detailed due diligence at the same time KKR did. So when I was putting my management team and I was sitting down in front of KKR, very often they would either be in the room or there would be a separate meeting on particular aspects that they wanted to look at.
Sarah Bool
How comparable is the bid now between what the creditors are now offering and what KKR were?
Chris Weston
I can only talk from an operational perspective, but the absolute amount they would invest is very similar to what KKR would have put in place. A lot of work has been done by management and the creditors in distilling from KKR the best elements and building them into the new plan that the creditors are putting in place, which means that there is a fair amount of similarity between the two now.
Sarah Bool
You said that KKR shared information, so what information was shared? Was it ultimately its DD reports?
Chris Weston
Yes.
Sarah Bool
So it was quite happy with that being shared?
Chris Weston
It was agreed beforehand that the creditors and the company would have access to all that material. This allowed us to look at how we target cleaning of our sewage network in a different way, and the value in cleaning more and cleaning differently. I do not think we need to go into the technicality, but that kind of insight will help us improve the performance of the company.
Sarah Bool
It almost does not feel like there is an open competition. I appreciate that the creditors have always been waiting in the wings; they have been working basically in parallel with KKR. On the other hand, Sir Adrian, you said that the creditors have contractual control over the company at the moment. I still do not think they are a preferred bidder nor is there a true competition now because my concern is that, as directors, you have a duty to act in the best interest of the company. It sounds as though you are hamstrung by the financing terms and the fact that the creditors have contractual control. Is this really the best bid?
Chris Weston
The proposal that the creditors put forward at the same time as KKR pulled out was completely independent of KKR and was different from KKR’s bid. Since then, we have spent time going through the KKR bid and how it was put together, and we have taken the best bits from it to build into the creditor plan. Therefore, it was developed independently and provided competitive tension. It provided an alternative for the board to look at.
Chair
We are into this same pattern; there is a course of conduct emerging here. You have decisions to make between various bids each time. Each time, it seems that you make a decision that—on the face of it—is not logical and you just tell us and expect us to accept that that was the best possible option. You will not produce the minutes for these decisions. You can see why I say it is difficult for us to be sure about whose interests you are pursuing and protecting here.
Sir Adrian Montague
I very much regret that that should be the case.
Chair
I am trying to be clear.
Sir Adrian Montague
We are enormously conscious of the gravity of the situation and the difficulty of finding your way through it. This has been an extraordinary period and we are constantly considering what is in the best interests of the company. When you say the company here, it is a collection of interests: the customer interest, environmental interest, there is a bit of political interest in there but not a great deal, and the interests of the future owners and creditors. It is a very complicated set of issues to untangle and decide what the way forward is.
Chair
We are aware of CKI, Castle, and there has been a third reported. I do not think it became a formal bid but an expression of interest or an offer from a company headed by Lord Redesdale, which I think is now in the public domain. Can I be quite clear about the dismissal of these three options? Were the decisions to dismiss them all taken by the board? That is a yes. Can we get the minutes for these meetings?
Sir Adrian Montague
I will need to take advice because we just need to protect confidentiality the best we can. We have talked quite a lot about Castle Water and CKI. In the case of Lord Redesdale’s proposition, it is essentially one sheet of paper, not the 1,000 pages we received from the other two bidders. I think he regards it as a sort of outline concept.
Chair
Were these board decisions?
Sir Adrian Montague
These were decisions of my ERSCO, my equity raise subcommittee, AKA the board.
Barry Gardiner
The KKR bid would have needed creditors to agree to it in a court vote on a restructuring plan. So creditors were effectively negotiating terms here; that is part 26A of the Companies Act 2006. There is clearly a conflict between creditors where they are bidding against other parties, especially where we have a public interest in ensuring proper operational outcomes in terms of the environment and accountability of Ofwat. Do you not accept that?
Sir Adrian Montague
It is no different from many other cases where secured creditors are taking control of a company. This happens on many occasions in commercial life.
Barry Gardiner
So you accept there was a conflict of interest and the creditors were effectively negotiating terms with KKR?
Sir Adrian Montague
As I said earlier, there are many different interests at play here.
Barry Gardiner
And they secured their own.
Sir Adrian Montague
I do not think that is correct because all these propositions require the support of Owat in particular. Ofwat represents a public interest as much as anybody.
Barry Gardiner
Yes, indeed. Ofwat has a role to play in pulling the plug on this right now.
Sir Adrian Montague
It is in detailed discussion with us, the creditors and the board.
Sarah Bool
I am just trying to understand this. In terms of when KKR shared that information, on what basis or grounds did it share it? Because obviously it has incurred a huge financial cost.
Sir Adrian Montague
Which information?
Sarah Bool
You said about the due diligence reports and so on.
Sir Adrian Montague
To be honest, in the wake of its decision to withdraw, KKR has behaved honourably.
Sarah Bool
It was not paid for—
Sir Adrian Montague
We paid for most of the due diligence costs; I do not think we paid it all. Therefore, it has made that information available to the company and the creditors, and we are benefiting from it because it did a cracking job.
Sarah Bool
But the creditors were also operating and preparing their own bid alongside KKR. Equally, to have the information that KKR needed, it would have had to speak to the creditors to get the confirmation. So it is like marking its own homework for a bid that then comes out.
Sir Adrian Montague
It has had that information after the withdrawal of KKR.
Sarah Bool
But the creditors are actually given that information because of the loan structure and funding. There could be questions raised about the comfort that KKR could not get because the creditors ultimately wanted the bid.
Sir Adrian Montague
I have heard no word of protest or reservation from KKR. It was quite clear in saying to us it saw no financial or operational reason why its investment should not proceed.
Sarah Bool
I find this very difficult because it is incredibly serious to get to this stage after 10 weeks—
Sir Adrian Montague
I agree.
Sarah Bool
—and then not be able to get your finances over the board. That is very unusual in this day and age.
Sir Adrian Montague
It is their investment committee.
Sarah Bool
Well, investment committee, but that is serious, and I do not think that is just politics alone, if I am being honest.
Chair
No.
Sir Adrian Montague
I agree. It was a great shock and disappointment.
Chair
Sir Adrian, you have been in the City for a long time. Have you ever seen corporate governance like this?
Sir Adrian Montague
I do not think there has ever been another situation like Thames.
Ian Pearson
There were a lot of people at KKR who were heavily involved with the bid over a number of weeks. They were deeply committed to it and very disappointed when their investment committee decided that it did not want to support making—
Chair
So they were not angry, just a bit disappointed.
Sarah Dyke
If I could just take you back to the £3 billion loan, obviously being split into two tranches. If you complete the equity raise process without requiring the full £3 billion loan, what obligations do you have on the remaining undertaken balance of that loan?
Chris Weston
The first £1.5 billion is committed; the second £1.5 billion is not. So the terms of the first £1.5 billion have been agreed, but as you go through the equity process, and there is likely to be a debt-for-equity swap where the creditors will take the equity, they will also look at refinancing the debt stack, including the super-senior facility.
Sarah Dyke
Are you obliged to draw down the balance?
Chris Weston
No.
Sarah Dyke
Did you borrow too much?
Chris Weston
That is quite a difficult question to answer. No, we did not. We negotiated an amount in two tranches. In fact, the second £1.5 billion also splits into two tranches of £750 million each. We negotiated an amount that we thought gave us a stable foundation from which to complete the equity raise and to reach agreement with Ofwat over the regulatory conditions that would apply to us. The second tranche of £1.5 billion was there in case we went to the CMA and needed it. The terms around it have yet to be agreed.
Sarah Dyke
So it is accruing interest for its creditors?
Chris Weston
The first £1.5 billion is; the second is not.
Sarah Dyke
Who is paying for that?
Chris Weston
That is paid for by that facility.
Sarah Dyke
So customers will not be paying for that?
Chris Weston
Customers will not be paying.
Chair
Sorry, what do you mean that is paid for by that facility?
Chris Weston
The structure of the facility includes funding that allows you to pay for the interest, consent fees and everything that goes with it; it is not paid for by customers.
Sarah Dyke
Can I just drill down into that a little more? Can you just explain that to the Committee please?
Chair
Can I get a mortgage on these terms?
Chris Weston
Say that again.
Chair
Can I get a mortgage on these terms that pays itself?
Chris Weston
It is a very complicated financial transaction. We have advisers who have more detail than I will have. But regarding the consent fees, fees are paid to the participants who are lending and might underwrite that amount for the interest that is paid. All that amount will be built into the facility and debt itself and is paid out of the facility to pay those consent fees.
Sarah Dyke
At no stage would this be filtered down to your customers?
Sir Adrian Montague
Can I try it another way? That might be a good idea. We get our money from customers and 100% of that—without any condition or reservation—is applied to the operations of the company. But the money that we get from customers is not enough to meet all our investment requirements. We draw the balance from debt facilities; in good times from capital markets, in bad times from the super-senior facility. The super-senior facility has an interest cost to it, which we have to pay, and the only way we can pay it is by drawing more amounts under the facility.
Sarah Dyke
But you have drawn down a full £3 billion loan.
Chris Weston
No.
Ian Pearson
No.
Sarah Dyke
You have drawn down half of that.
Chris Weston
We have drawn down half of the first £1.5 billion. In fact, it is not quite half yet because we have just had a third consent that will allow us to draw a bit more down, which will see us through until about September.
Sarah Dyke
I just want to go back into the creditors. Barry has already gone into a little detail on that. You have your creditors now; we have the list, which was given to us at 5 pm yesterday. Just for absolute clarity, why was that only given to us at 5 pm yesterday?
Sir Adrian Montague
Because each member of that committee—each of the 15 names that you have there—needed to go through their own internal compliance processes in order to have consent to release their name to the Committee. You may think it was quite long-winded; I would not want to comment on that. We had hoped to do it on Friday; it did not come through until yesterday.
Sarah Dyke
Can you explain why that process was necessary?
Sir Adrian Montague
Each institution has its own rules regarding the extent to which it appears on public record. They just wanted to be sure so they had to go through their processes internally.
Sarah Dyke
You have also stated that the creditors have a strong track record of helping complex businesses grow through committed capital and long-term stewardship. Can you just explain a little more about what that record actually is and share some examples of companies that they have helped grow?
Sir Adrian Montague
I cannot off the top of my head. I am very happy to write to you on that. It is really a question for the creditors rather than me, but I will do my best to answer it.
Sarah Dyke
Can you just explain the due diligence that you have done in regard to these creditors?
Sir Adrian Montague
The creditors are our lenders of record and many have been there for many years. There will probably have been due diligence done at the start when the loans were taken on.
Sarah Dyke
Probably?
Sir Adrian Montague
Honestly, it is not customary in the market to do due diligence on your lenders. They are the people who provide the liquidity to keep the company’s operations running, and in good times that is regarded as the right approach. You have checks on bona fides, but you do not necessarily look at their record in terms of how they would behave if the loan went bad.
Sarah Dyke
The Chair has already picked up on Elliott being one of those creditors, which worryingly acquired BP and then obviously has pushed for the offloading of renewable businesses. Surely there should have been some proper due diligence done on that basis.
Sir Adrian Montague
Some creditors will have bought the debt in the market. That is not a transaction that involves the company at all. I do not know what the position is as regards Elliott.
Chair
It is now wanting to move into a different role. But as you have told us already, you can do due diligence, but frankly, it is going to make no difference; they control you anyway.
Sir Adrian Montague
When you take on the debt in the first place, you assume that you take on debt in the ordinary course. You approach a syndicate of lenders and do checks on money laundering and all that routine governance, but their bona fides is represented by their willingness to lend you money. When you take on debt in an ordinary, well-operating company, you do not say, “What’s going to happen if this company runs into difficulty?” because that is not the plan, intention or outcome you seek. You are just asking, “Are these checks good for the money?”
Sarah Dyke
There is such a huge number of businesses involved here. We have a consortium of over 100 anonymous—well, not anonymous now because we have the 15 here but there obviously are others—companies ranging from pension funds to activist investors. There is the Royal Bank of Canada in that list as well. Do you think that they can effectively exert long-term, collective stewardship?
Sir Adrian Montague
They will appoint a board of directors. We do not know what their intentions are regarding the appointment of directors. I understand there is a discussion under way with Ofwat to work out what sort of governance structure it would like to see these very special situation lenders have in place. But their control will be exercised through the board. This is something you probably need to discuss with Ofwat because it is their discussion at the moment.
Ian Pearson
When we are looking at these 100 institutions, these are the institutions that you will find in the share cap table of pretty much all the publicly quoted utilities. They do not seem to have a problem—whether it is Centrica or Severn Trent—in terms of having acceptable governance arrangements.
Chair
You do not think other water companies have problems?
Ian Pearson
I am saying these same investors—
Chair
Have invested in other companies—
Ian Pearson
—have invested in other water companies.
Chair
—that are in exactly the same position or on the way to being in the same position.
Ian Pearson
To that extent, it is not that different to the situation with Thames.
Sarah Dyke
I am interested in transparency here. We hear that we do not think it is going to be much different or there should not be a problem. We have had the promise of enhanced transparency, and you have used the word among you a number of times today. What does this look like compared to the current situation and is this an admission that Thames has not been appropriately transparent up until now?
Sir Adrian Montague
I do not think so. As the Chairman said, it is instructive to compare the position of the listed water companies. Three of the water companies are listed on the stock exchange; they probably have hundreds of thousands of individual investors. You do not know much about any one or more of those individual investors. I cannot now remember if it is 3% or 5%, but the large holders need to declare their holdings. The others are not publicly recognised or available. That is the way the system works for the big listed companies. After we have gone through this process and restructured the balance sheet and some lenders have exchanged their debt for equity, it will be the same position as it would be for a big listed water company. There will be a mass of shareholders, many of whom will not be known to the public because their shareholdings have not reached the level where compulsory disclosure is required. Even in the listed markets—beneath the threshold for mandatory disclosure—you do not publicly know who the shareholders are. The company will because it looks at the register, but out there in the wide blue yonder, there is no real knowledge of who the shareholders are.
Sarah Dyke
Just as a final point there, will you pledge to ensure that we receive this enhanced transparency? Getting this list of creditors after being pushed on that for some time is absolutely important.
Sir Adrian Montague
To be fair, the Chairman wrote to me last Tuesday or Wednesday, I believe. We jumped to it and asked the members of the committee for their agreement to disclose their names. This is not something you do every day.
Sarah Dyke
We got there eventually.
Sir Adrian Montague
We pushed them gently.
Sarah Dyke
Will you pledge to better transparency going forward?
Sir Adrian Montague
Yes.
Chair
We are making heavy weather here, but I am going to stick with this until we are through it.
Henry Tufnell
In terms of the creditors’ plans, I do not think there has been a commitment in respect of dividend payments and there has been a hint at public listing. What is the plan to get a return on investment for the creditors?
Chris Weston
The creditors have said that they are not expecting any dividend payments while they own the company. As I understand it, their intention is to IPO the company at some point in the future, and that is where they will make their return.
Henry Tufnell
Sorry, say that last bit again?
Chris Weston
The dividends that they could have taken will be reinvested back in the company to improve its performance, and then the return will be generated on their exit—some time off in the future—when they list the company. That is the intention at the moment, as I understand it.
Henry Tufnell
Is there an intention to inject fresh equity?
Chris Weston
Yes.
Henry Tufnell
What about exchange for debt?
Chris Weston
There will be a debt-for-equity swap. The precise details and shape of that have yet to land because they are going through their discussions with Ofwat and need to understand what the regulatory conditions will be because that will inform what the financial structure looks like. When they get that, then we will know exactly how much equity is going in and how much debt will be written off.
Sir Adrian Montague
The creditors put out a press release a few weeks ago in which they said they expected to inject £3 billion of equity to secure £2 billion more of fresh lending to the company and that the total value of the package is likely to be £17 billion. I am not quite sure how they got to that figure, but it is certainly a large amount. The balance between new funds injected as equity or debt is in the write-off of some existing lending because the ambition that everybody has is that after the transaction has been completed, we will reduce the gearing comfort level to 60% or under. That can only be done when you have new equity by reducing the amount of the debt so the debt will be written off. That is all part of the court process that we are hoping to come to later in the year or perhaps the beginning of next year.
Henry Tufnell
Your documents describe it as a material write-down in respect to the debt. I wonder whether it is a better or worse deal for Thames than write-downs offered by KKR or other bidders.
Sir Adrian Montague
We have not got to that stage with any bidder. We did not get to that stage with KKR and have not got to that stage with the creditors.
Henry Tufnell
We do not really know what stage you got to with KKR because you will not release the board minutes and you will not release the minutes on the other. So there is a lack of transparency, is there not?
Chris Weston
I do not think there is a lack of transparency; it just reflects the situation that we are in at the moment. KKR did not put forward a formal offer in the end, but that offer would have been caveated and would have had to agree the financing with the creditors and a regulatory regime that was applicable to Thames with the regulator. Once all that was in place, then you would have certainty over what the balance sheet would look like. It would involve a haircut, but we did not get to that point in the process, so the process is now continuing with the creditors.
Henry Tufnell
Is it a better or worse proposal than the one offered by KKR?
Chris Weston
As I said, we cannot judge the final structure of the company because KKR did not get that far.
Henry Tufnell
The class A creditors are going to raise £2 billion more of debt. Do you think that more debt is the solution?
Sir Adrian Montague
Bear in mind that is new debt. The issue is what happens to the old debt. Under this court process that we are envisaging contemplating for the end of the year, much of the old debt will be written off. If you think about the capital structure of Thames in the debt side, right at the top, you have the super-senior advances that we are now receiving from the creditors. Then you have something called the swaps; there is a tranche of money that the banks have provided for swaps. Then you have the £15 billion or so of A lending and £1 billion of B loans; B creditors have been in contact with the Committee in the past. Underneath that, you have some debt due to the parent company. We do not yet know how much of that debt will be written off. If the creditors are right in saying that they are going to provide £5 billion of new money but their package is worth £17 billion, you think that they are expecting a write-off of a huge amount of the existing debt. We have not got to that stage yet, but that is why we say there is going to be a material impairment of the existing loans.
Henry Tufnell
So you cannot give a figure as to how much debt there will be on day one?
Chris Weston
Not yet.
Sir Adrian Montague
Not yet.
Ian Pearson
Not yet, no.
Sir Adrian Montague
But the aspiration is to reduce our overall gearing level to beneath 60%, which is where Ofwat wants to see it. This is a huge, bitter pill for the lenders to swallow.
Chair
You raised earlier about being subject to special administration and that you are not particularly keen on it as an option. But from the point of view of the taxpayer, how much do you think it would cost?
Sir Adrian Montague
There is a feeling in some quarters that special administration is a silver bullet that wipes everything clean.
Chair
How much do you think it would cost the taxpayer?