Thames Water has missed its leakage target for the first time in 11 years, according to its Annual Report and Accounts for 2016-17 published today.

As a consequence of failing to meet its leakage reduction commitment in 2016-2017,Thames will be penalised £8.55 million - the maximum automatic penalty under the performance commitment regime .The penalty is borne by the company alone and cannot be passed on to customers.

In addition, water industry regulator Ofwat has opened an investigation to consider whether enforcement action is needed over and above the automatic penalty.

Responding to the announcement today by Thames Water, Ofwat Chief Executive Cathryn Ross said:

“The failure by Thames Water to meet the leakage commitments it has made to its customers is unacceptable. Our performance commitment regime imposes significant penalties for failure to deliver the levels of performance that customers have paid for and consequently, Thames Water will now face the maximum penalty. We take very seriously our responsibility to ensure that every water company is delivering for its customers and where they fall short, we do not hesitate to step in to protect customers’ interests.”

CCWater - failure to meet target sends completely wrong message to customers

Sir Tony Redmond, London and South East Chair for the Consumer Council for Water, said:

“Thames Water’s failure to meet its leakage target sends completely the wrong message to its customers at a time when households are being encouraged to use water more wisely.”

“We have repeatedly called on water companies to show more ambition in reducing leakage, which is an issue that really matters to consumers. We welcome Ofwat’s investigation into whether the company should face further action for breaking its commitment to customers.”

Thames CEO " leaks are inevitable on a network of our enormous size and age"

Mains replacements are vital to ensure network resilience - despite replacing over 2,800 km of its pipes since 2004, 25% of Thames Water pipes are still over 100 years old,

Steve Robertson, who was appointed as Chief Executive Officer at the water company in Spetember last year, said in the report:

“During the last year we’ve seen a series of major bursts on some of our Victorian water pipes and we’ve missed our leakage target. Leaks are inevitable on a network of our enormous size and age, but it’s vital we invest wisely and continually to improve our resilience.”

The company said it has increased investment in leakage reduction during the year and is trialling a raft of new technologies to improve performance and reduce susceptibility to extreme weather.

Other financial penalties incurred for failures to meet a number of other performance targets during 2016/17 included:

• Security of supply Penalty: £2.3 million
• Sewer flooding other causes Penalty: £0.5 million
• Sewage treatment works discharge compliance Penalty: £2.3 million
• Condition of below ground water network - Penalty: £4.7 million

Major pollution incidents between 2012 and 2014 led to £19.75m fine by Ofwat

Commenting in the report on the £19.75 million fine imposed by Ofwat in March 2017 for a group of pollution incidents which occurred between 2012 and 2014, Chairman Sir Peter Mason KBE said:

“We deeply regret these incidents. We’re doing things very differently now. We’ve been more proactive in our wastewater network maintenance, changed our management structure in the affected region and invested heavily in our infrastructure and control systems.”

“..2016 was a year of re-evaluation for our water business after a cluster of significant bursts on our Victorian pipes affected customers in London and contributed to us missing our leakage target.”

“… we take each incident and its impact on our customers very seriously and there’s a lot of work going on to understand why they happened.”

Chief Executive Officer Steve Robertson said:

“We’re also paying a high price both financially and reputationally for major pollution incidents between 2012 and 2014. We have apologised and learned our lessons.”

“Since the events we’ve put in place new procedures and personnel, invested heavily in infrastructure, training and control systems, to limit the possibility of any such repeat and strengthen our position as a good corporate citizen.”

£1 billion-plus capital expenditure during the year

Capital expenditure during the year totalled £1,115.3 million (2016: £1,198.7 million) including £37.1 million on development and interface works the Thames Tideway Tunnel. £65 million on the Deephams sewage treatment works upgrade and £38.2 million on a new customer relationship management and billing system. Net operating costs increased by £96.0 million (6.8%) to £1,515.4 million from 2015/16.

Thames made £638.4 million operating profit during the year.

267 GWh of electricity generated from sewage in 2016/17– best ever performance

On energy, Thames said its investment in producing energy from sewage was starting to pay off after a slower than expected start last year. Thames generated 267 GWh of electricity from sewage in 2016/17–its best ever performance The energy intensive provision of essential services makes energy one of the utility’s largest single operational costs - over £50 million a year to power the water treatment process alone.

Combined with the 6.4GWh generated and used from other sources, one fifth of Thames’ electricity came from renewable sources, including its own generation, saving £24 million off the annual energy bill.

Last year saw the construction of Europe’s largest floating solar panel array on the Queen Elizabeth II reservoir, which part powers Hampton water treatment works.

 The company is aiming to source 33% of its energy from embedded renewables by 2020.

Pension funds now represent more than two thirds of shareholders

The company’s Regulatory Capital Value (RCV) is put at £12.9 billion - 2016/17 saw the announcement of a change in Thames’ largest shareholder.

Borealis Infrastructure, the infrastructure investment manager of Ontario Municipal Employees Retirement System,one of Canada’s largest pension plans, and Wren House, the global direct infrastructure investment arm of the Kuwait Investment Authority, acquired the 26.3% Macquarie-managed stake. The sale completed on 31 May 2017.

Fiera Infrastructure (Aquila) increased their interest to nearly 5%, meaning more than two thirds of shareholders now represent pension funds.

On the £4.2 billion Thames Tideway Tunnel construction project, which is being delivered by an independent company – Bazalgette Tunnel Ltd - from 1 April 2016 started recognising revenue on the arrangement with BTL as agreed with Ofwat.

As cash is collected, it is passed on to BTL to fund the construction of the tunnel. The cash collected and paid over to BTL during the period of construction represents a prepayment for the use of the tunnel once the project is complete.

By the end of the AMP6 regulatory period (2015-2020), Thames Water expects to have spent £1.4 billion in total on its share of the works.