Thames: large exceptional items belie underlying progress

Thames Water published its annual report for 2024/2025 with a headline-generating reported loss before tax of £1,647m. This compared to a profit of £157m the previous year. Excluding the exceptional items totalling £1,776m, the underlying loss before tax for Thames Water was only £6.2m.

Exceptional costs included a £1,271m non-recoverable credit loss provision, recognised against the inter-company loan receivable from Thames’ immediate parent company Thames Water Utilities Holdings Limited; £122m of provisions raised for fines as a result of Ofwat's investigations; £151m of restructuring costs and £198m of fees related to the restructuring plan. With the exception of turnaround expenditure of £33m, which management said will enable more efficient and improved services for customers, the exceptional costs will not be borne by customers.

Other aspects of the financial report demonstrated progress. Thames Water’s underlying operating profit increased by 25% to £556m ahead of its revenue increase of 8.4%. Thames reported liquidity of £1.7bn at 31 March 2025, comprising cash of £0.2bn and the £1.5bn super senior loan facility. Liquidity financed an increase in capex by 6.7% to £2,225m. Net debt increased by £1,653m. Debt/Regulatory Capital Value now stands at 84.4%, up from 80.6%.

Although management flagged again that it may take a decade to completely reverse Thames’ poor performance, there are glimmers of improvement. The company delivered improved performance at the end of AMP7 for seven of Ofwat’s 12 key Water Company Performance Report measures (supply interruptions, leakage, mains repairs, sewer collapses, internal sewer flooding, per capita consumption, and Priority Services Register). Thames has replaced over 200km of water mains so that leakage is now at its lowest ever level, down by 13.2% since 2020 (but compared to a 20.5% reduction target set by Ofwat). Water quality (CRI) was the second-best result in over the five years.

In line with some of its peers, significant rainfall and high groundwater levels led to a 34.3% increase in pollutions. Its Outcome Delivery Incentive penalties increased to £88.2m from £56.9m. There were no performance bonuses paid to senior management. The debate on proposed retention payments to senior managers, which are not performance-related, continues with Ofwat and the Government.

Thames said it now has a new organisation structure led by the chief operating officer, focused on infrastructure – which it says “brings clearer accountability and has helped our transformation continue to gain momentum.” Management continues to hope that it can find a solution that removes the need for a referral to the Competition and Markets Authority (CMA). It has requested, and Ofwat agreed, to further defer the price determination appeal until 22 October, as Thames continues to pursue a market-led solution for the recapitalisation of the company, including through an equity raise, without the need for a CMA reference. Ofwat had previously agreed to an 18 week deferral from 18 March.

Thames wants “a full reset of the regulatory landscape, based on the reality of where we are.” 

The recapitalisation continues with what management calls its “supportive” creditors with “constructive” but also “difficult” conversations with stakeholders. Management confirmed that Ofwat is currently examining the A creditors’ proposals.