Thames Water’s interim CEOs are warning that “turning around Thames will take time. We simply cannot do everything that our customers and stakeholders wish to see at a pace and for a price that everyone would like... It is clear that immediate and radical action is required.”

The comments come with the publication this morning of Thames Water Utilities Ltd (TWUL) Interim results for the six months to 30 September 2023.

Introducing the results, Interim Co-CEOs, Cathryn Ross and Alastair Cochran said:

“Today, we have announced a solid set of results with improvements in our key operational priorities and underlying financial performance in the first half. We’ve also invested a record £1 billion in the period to increase resilience in our network, improve customer service and environmental performance, and mitigate the impacts of climate change and population growth.

“We have also submitted our business plan for 2025-30 to Ofwat as part of its PR24 price review and had our refocused Turnaround Plan approved by our Board. These plans build on what we have achieved over the last two years, and will deliver a turnaround in performance and step change in investment in the areas that matter most to our customers.

“Our shareholders support this much needed investment, underscoring their commitment to delivering Thames’ turnaround and life’s essential service for the benefit of our customers, communities, and the environment. At the same time, we recognise our customers are continuing to face cost-of-living challenges. We’ve therefore further increased our social tariff support in the first half of this year and our plans for the next regulatory period set out an expectation that we will provide over 530,000 households with meaningful support with their water bills.

“Turning around Thames will take time. We simply cannot do everything that our customers and stakeholders wish to see at a pace and for a price that everyone would like. We will continue to make the tough choices required to deliver what matters most to our customers and the environment. By being honest about what we can deliver and transparent about what we are doing, we believe we will build the trust and support we need from our customers and stakeholders if we are to succeed in our ambitious plans.”

“Our refocused turnaround plan”

Cathryn Ross and Alastair Cochran have launched what they describe as “our refocused turnaround plan” in the Interim Chief Executives’ Review, saying:

“Across many areas of performance, we are in line with water industry averages. But in some other areas our performance needs to improve, including some areas of operational and environmental performance…..Our financial performance also needs to improve. It is clear that immediate and radical action is required.

“It is not possible to address all the challenges facing Thames Water at the same time. Delivering a turnaround in performance requires a focus on the priorities that most matter now.”

“Structured and rigorous process”  undertaken to develop refocused, three-year Turnaround Plan

The CEOs say they have therefore undertaken “a structured and rigorous process” during the first half of this year to develop a refocused, three-year Turnaround Plan which focuses on six key operational priorities –

• health and safety
• customer complaints
• water quality
• leakage
• supply interruptions
• pollutions.

According to the Thames Chiefs, the plan will provide a springboard to deliver “our ambitious plan” for customers and the environment during the AMP8 regulatory period 2025 to 2030 and is based on “a resolute focus on understanding root cause issues and prioritising improving key outcomes.”

The CEOs state that the plan also builds on good progress in recent years in building back some “core internal capabilities that had been lost” in areas such as health and safety, capital delivery, some aspects of operational performance, customer contact, asset maintenance and stakeholder engagement.

They go on to state:

“Whilst business resilience remains fragile with frequent failures in our ageing infrastructure, we have taken a risk-based approach to improve reliability by more closely managing core assets and we have started to bring greater rigour to maintenance practices. We have also developed long-term asset plans to build resilience and redundancy that will ultimately restore operations to a level our customers expect.”

Financial resilience

Looking further ahead, the CEOs emphasise they are “fully committed to deliver a step change in investment and performance” and that Thames Water continues to maintain high levels of liquidity, diversify sources of funding, pre-fund maturities and maintain a balanced debt maturity profile.

A step change in investment is being funded through a combination of customer funding, debt capital and new equity, the CEOs say. Consequently, and as expected, both net debt and regulatory capital value increased in the ,first half. This resulted in senior gearing of 79.5% as at 30 September 2023, below the maximum allowed under the company’s covenant of 95.0% and the 85.0% lock-up level.

With regard to funding, the CEOs say that as previously disclosed, shareholders have agreed to provide a further £750 million in new equity funding across AMP7 subject to satisfaction of certain conditions, adding:

“We continue to have constructive discussions with all stakeholders to satisfy these conditions.”

Commenting in his capacity as Chief Financial Officer, Alastair Cochran reported that underlying profit before tax (excluding amounts related to BTL and exceptional costs) decreased by £288 million to £206 million. Total revenue in the first half of the financial year increased by £135 million to £1,270 million. A total tax charge of £74 million was recognised in the first six months of 2023/24 comprising a current tax charge of £97 million, reflecting the use by TWUL Group of tax losses from other Kemble group entities, and a deferred tax credit of £23 million.

Capital expenditure

In the first six months of the financial year, Thames invested £1,049 million in assets, including £97 million relating to capitalised borrowing costs. The £241 million year-on-year increase reflects the ramp up in the utility’s AMP7 investment programme, including:

• £303 million invested through its in-house Capital Delivery vehicle, including: £41 million on water distribution mains replacement and rehabilitation in London and the Thames Valley; and, £20 million on the installation of new water trunk mains, including the Faringdon to Blunsdon route
• £125 million invested in the water network to reduce leakage and improve our trunk main network
• £77 million on major projects, including £34 million upgrading the major sewage treatment works at Beckton, Mogden, Greenwich and Crossness
• £16 million on connecting the network to the Thames Tideway Tunnel, including the Beckton Inlet works
• £46 million on the metering programme

Dividend payments

In October 2023, following the period end, Thames Water Utilities Ltd paid dividends of £37.5 million to Thames Water Utilities Holdings Ltd. These proceeds were subsequently distributed by  to Thames Water Ltd and then through to Kemble Water Finance Ltd KWF retained the proceeds to service its and its subsidiary Thames Water (Kemble) Finance plc’s - external debt obligations.

No distributions were made to external shareholders of the group, who own shares in Thames ultimate parent company, Kemble Water Holdings Ltd.

PwC cautions “future events or conditions may cause the group to cease to continue as a going concern”

Auditors PricewaterhouseCoopers say in the report

“Based our review procedures, which are less extensive than those performed in an audit as described in the Basis for conclusion section of this report, nothing has come to our attention to suggest that the directors have inappropriately adopted the going concern basis of accounting or that the directors have identified material uncertainties relating to going concern that are not appropriately disclosed. This conclusion is based on the review procedures performed in accordance with ISRE (UK) 2410. However, future events or conditions may cause the group to cease to continue as a going concern.”

Going concern - "Board continues at this time to have sufficient confidence that it remains the intention of shareholders to provide additional funding"

In assessing the appropriateness of the going concern basis, the Interim Report says the Directors have considered the following factors:

1. In June 2022, to support Thames Water in the delivery of its updated business plan, shareholders provided a commitment letter where they agreed to contribute, or cause to be contributed, an aggregate £500 million of funding, available to be drawn in full by the Group in March 2023. This funding was received on 30 March 2023.

2. There has been a continual and constructive engagement with shareholders on further support in AMP7 to enable Thames Water to deliver its business plan. Consequently, on 10 July 2023 shareholders provided a letter setting out further support totalling £750 million during the remainder of AMP7. This support is subject to specific conditions including Investment Committee approval by each shareholder and, consequently, it has not been considered in the liquidity assessment for the going concern review.

Kemble Water Holdings Ltd confirmed to Thames Water Utilities Ltd on 1 December 2023 that the 10 July 2023 letter remains in effect subject to its terms and conditions.

The Interim Report says the Board continues "at this time to have sufficient confidence" that it remains the intention of the shareholders to provide the additional funding and constructive discussions remain ongoing between Ofwat, shareholders, Thames and other stakeholders, "although the conditions have not yet been satisfied,"

Click here to read the Interim Results Report in full