Tideway has flagged up increased exposure from inflation and Thames Water in its principle risks assessment set out in its Annual Report & Accounts 2023/24 published on 21^st June 2024.

Tideway’s Board Risk Committee considers:

• Corporate risks - those that might impact on the financial and reputational viability of the company.
• Programme risks - which impact the physical delivery of the tunnel and associated works.
• Principal risks - which bring together the corporate and programme risks that have the potential for the most material impact on the business.

The report says that during the year the privately financed company which is responsible for building, commissioning, financing and maintaining the Thames Tideway Tunnel has assessed its principal risks regularly, including consideration of whether there were material changes to increase or decrease its risk exposure.

Tideway has nine principal risk categories, each of which is assessed against its target level - the overall exposure has remained broadly stable with the exception of inflation and Thames Water.

The principal risks are:

1 Health, Safety & Wellbeing (No change in risk level)

2 Programme Delivery (No change in risk level)

3 Supply Chain Failure (No change in risk level)

4 HILP - High impact, low probability events (No change in risk level)

5 Credit Rating (No change in risk level)

6. Inflation (Increased exposure)

7. Reputation (No change in risk level)

8. Thames Water Performance (Increased exposure)

9. Regulatory and political (No change in risk level)

The report says there is a risk that a decrease in inflation or the Retail Price Index (RPI) reform could have a negative impact on Tideway’s business – the risk related to inflation has increased as inflation forecasts have fallen. Inflation has wide implications for Tideway’s business and shareholder returns. However, high inflation is not seen as a risk to Tideway as the company receives higher revenue as the RCV ( Regulatory Capital Value) increases with inflation.

While all other principal risks show no change in risk level, the report says:

“We note Thames Water’s evolving financial position and this has led to increased concern that its situation might change. We remain confident that Tideway’s revenues are well protected given water industry legislation and the licence obligations that apply to both Thames Water and Tideway. We continue to work effectively with Thames Water to deliver the benefits of the project.”

Thames Water is a key partner for Tideway - the water company has a licence obligation to pass revenues to Tideway under the Revenue Agreement. In addition to the Revenue Agreement, Tideway has an Interface Agreement in place that governs several important interactions with Thames Water, including access to the Thames Water network to facilitate Tideway works during the handover and acceptance process and in the operational period. A licence breach by Thames Water is enforceable by Ofwat.

The report states:

“Thames Water’s failure to deliver its share of the works or support delivery of Tideway works could affect our ability to deliver our investment programme on time and on budget. If Thames Water does not comply with the Revenue Agreement, it could have a financial impact.“

Tideway says it is monitoring the impact of Thames Water’s corporate position and has received confirmation from Ofwat that the existing statutory and regulatory protections would continue to apply should Thames Water’s status change. These include that the Thames Tideway Tunnel is seen as essential for enabling Thames Water to comply with its sewerage duties under the Water Industry Act 1991 and that it has relevant revenue related licence obligations.

Thames Water Performance is one of six principal risk categories where Tideway has assessed their potential impact on Tideway’s viability in the Scenario Analysis set out in the Long Term Viability Statement in the Annual Report.

Tideway has modelled the following three separate scenarios for Revenue Collection (including bad debt) in relation to Thames Water:

• Scenario 9. A 50% under recovery in one year
• Scenario 10. A 50% under recovery in two years
• Scenario 11. A 50% under recovery in four years

The assessment says :

“Our revenue includes a building block that deals with under recovery of revenue, and therefore the impact would be temporary and limited.

“There is a possible risk that TWUL, given its current financial position, or a Special Administrator may choose not to pay an element of Tideway’s revenue. This would not be consistent with TWUL’s licence and would be expected to lead to a breach and enforcement action.

“After mitigation gearing and interest cover ratios would be consistent with an investment grade rating and compliant with Tideway’s financing covenants.”

Commenting on Mitigation Strategies, the report says:

“The value of the revenue collection increases each year as revenue is driven by the RCV which accumulates each year. However, the main mitigation strategy for Scenarios 9, 10 and 11 is that there is a building block that deals with the under recovery of revenue which mitigates the risk to an immaterial level.

“Furthermore, we have considered the scenario of TWUL or the Special Administrator choosing not to pay Tideway’s revenue. While the risk is reasonably low we have received clarification from Ofwat on the statutory and regulatory protections and actions that Ofwat would take in those circumstances.”