Thames Water: for honesty, disclosure is the best policy

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Thames Water wants to shed a reputation as ripe as the sewage it spilled into two rivers in southern England. Interim co-chief executive Cathryn Ross promised on Tuesday that Thames Water will be “honest” about what it delivers.

The group will not fix its creaking infrastructure overnight. But Thames Water should commit to a clean-up it can pursue more rapidly: simplifying its murky financial structure.

It is inappropriate for a company with public service obligations and a local monopoly awarded by the state to have such a structure that is so complex it is difficult to scrutinise. Complexity gives water companies room to quibble over what constitutes a dividend. That allows them to say no dividends have been paid when shareholders have extracted cash by other means.

Equally, MPs have accused Thames Water of using its complex structure to mislead them over a £500mn equity injection. Results for Thames Water’s parent, Kemble Water, revealed the £500mn injection was a loan from shareholders. It was “cascaded” to Thames Water via intermediate holding companies.

Thames Water has denied it misled MPs. True, the loan could at some point be converted to equity. The regulated company is under no obligation to repay it.

Thames Water meanwhile pays dividends that service debts of parent companies. In October, it gave £37.5mn to its immediate parent, Thames Water Utilities Holdings Limited. This was eventually paid to Kemble Water Finance Limited to service its external debt obligations and those of another subsidiary.

The borrowings of the group are not presented in Thames Water’s operating results. These show net debt at the regulated company increased 7 per cent year on year to £14.7bn. Net financing expenses decreased 20 per cent to £208.7mn.

Thames Water has said its shareholders have agreed to inject a further £750mn into the company. It is unclear how that injection will be structured.

Most big, quoted businesses have a master holding company whose results give a clear picture of finances. Public utilities should mirror that structure, even if they are private.

Disclosure proves our honesty. If Ross wants the company to convince the public of its honesty beyond her own tenure, radical simplification is essential.