Thames Water Utilities Ltd. -- Moody's Disclosures on Credit Ratings of Thames Water Utilities Ltd.

Moody's current ratings on Thames Water Utilities Limited its affiliates are:

Thames Water Utilities Limited (TWUL)

LT Corporate Family Rating of Baa1

Thames Water Utilities Finance Limited

Backed Senior Secured Class A rating of A3

Backed Senior Unsecured MTN program rating of (P)Baa1

Backed Senior Unsecured MTN rating of Baa1

Thames Water Utilities Cayman Finance Limited (TWUCF)

Backed Senior Secured Class A rating of A3

Backed Subordinate Class B rating of Baa3

Thames Water (Kemble) Finance PLC (Kemble)

Backed Senior Secured rating of B1

RATINGS RATIONALE

Moody's maintains a corporate family rating (CFR) of Baa1 with stable outlook on TWUL reflecting (i) the company's low business risk profile as the monopoly provider of essential water and sewerage services; (ii) stable returns under a transparent and predictable regulatory framework; (iii) a high level of gearing; and (iv) the creditor protections incorporated within the company's financing structure.

A corporate family rating is an opinion on the expected loss associated with a company's financial obligations assuming that it has a single class of debt and is a single consolidated legal entity. The Baa1 CFR is in line with the corporate family ratings assigned in two of the three comparable transactions in the UK water sector, Anglian Water and Yorkshire Water, and one notch above that for Southern Water (the latter was downgraded in July 2011 - please refer to the associated press release for further detail). Like its peers, TWUL's credit quality is constrained by the expectation that the company will maintain a highly leveraged financial structure and by its exposure to refinancing risk, i.e. dependence upon continued market access to fund ongoing capital expenditure and the risk of adverse financial market conditions that may prevent TWUL from funding its very large capex programme or refinancing its debt on reasonable terms. The rating consolidates the legal and financial obligations of TWUL, TWUF and TWUCF (both financing subsidiaries) and Thames Water Utilities Holdings Limited (a holding company), which together constitute the ring-fenced TWU Financing Group as defined under the terms and conditions of its MTN programme (the TWUL MTN Programme) and factors in the associated structural enhancements.

The A3 rating of the Class A Bonds issued under the TWUL MTN Programme reflects the strength of the debt protection measures for this class of bonds and other pari passu indebtedness (together, the Class A Debt), the senior position in the cash waterfall and post any enforcement of security. The rating also, however, factors in the subordinated Class B Debt (Class B Bonds and other pari passu debt) which, whilst it is contractually subordinated, serves to reduce the operator's financial flexibility. Downgrade or default of the Class B Debt could have an impact on the viability of the company's funding model as a whole since the inability to raise additional Class B Debt in the future could undermine the capital structure and affect the credit quality of the senior debt.

The Baa3 rating of the Class B Bonds reflects the same default probability as factored into the rating of the Class A Debt but also Moody's expectation of a heightened loss severity for the Class B Debt following any default, given its subordinated position.

The B1 rating assigned to the GBP400 million notes issued by Kemble (a financing subsidiary of Kemble Water Finance Limited, a holding company for TWUL) under its GBP1.0 billion Guaranteed Secured Medium Term Note Programme (the Kemble Notes), reflects (i) the low business risk profile of TWUL, as the monopoly provider of water and wastewater services in its area; (ii) the stable and transparent regulatory framework for the water sector in England and Wales; (iii) the high level of gearing at TWUL and other debt in the group (debt can increase up to 92.5% of TWUL's RCV before a distribution lock-up comes into effect); (iv) the terms of the TWUL MTN Programme; (v) the large capital investment programme planned by TWUL for the current regulatory period; and (vi) the terms of the Kemble MTN programme including a cash trapping provision.

WHAT COULD CHANGE THE RATING UP/DOWN

TWUF and TWUCF

The stable outlook on the ratings reflects Moody's expectation that TWUL's financing structure should be relatively resilient to downside scenarios due to the cash trapping triggers designed to ensure that cash is retained in the company if certain ratio thresholds are breached. Such cash could then be used to absorb the effect of possible downsides.

Given the company's funding structure and Moody's expectation that TWUL will maintain leverage close to the maximum level permitted by its financial covenants, there will be limited potential for an upgrade of its ratings. Upward rating pressure would require a material and permanent improvement in debt protection measures.

Negative pressure on the ratings could derive from (i) an unexpected, severe deterioration in operating performance that results in TWUL remaining persistently in breach of the distribution lock-up triggers; (ii) a material change in the regulatory framework for the UK water sector leading to a significant increase in TWUL's business risk; (iii) unforeseen funding difficulties; and (iv) TWUL being required to deliver the main part of the proposed Thames Tunnel.

Kemble

The stable outlook for the Kemble Notes reflects Moody's view that the transaction is reasonably resilient to downside sensitivities. Given the high leverage at TWUL, the additional debt at Kemble and Moody's expectation that there will be only limited de-leveraging over the life of the Kemble Notes, there will be little potential for an upgrade.

Under the terms of the TWUL MTN Programme, there is a distribution lock-up at the operating company if (i) Class A RCV gearing or Senior (Class A and Class B) RCV gearing exceeds 75% or 85% respectively; or (ii) Class A Adjusted ICR or Senior Adjusted ICR falls below 1.30x or 1.10x respectively. A material deterioration in these financial metrics, compared to forecasts and such that the trigger levels appeared more likely to be breached, would result in negative rating pressure for the Kemble Notes. Such deterioration could be the result of serious underperformance in operating or capital expenditure at TWUL, or adverse macro-economic developments, including deflation. Negative funding conditions or adverse changes in the regulatory framework or structure of the water sector in England and Wales may also cause downward rating pressure.

Again, we note that it would likely strain the credit standing of TWUL and hence Kemble if TWUL were to be required to deliver the main Thames Tunnel (estimated construction cost GBP4.1 billion). We consider, however, that this is unlikely.

The principal methodology used in these ratings was Moody's global Rating Methodology for Regulated Water Utilities published in December 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.

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