Thames looks to extend liquidity and ‘live within its means’ ahead of new equity search

Thames Water is at risk of running out of cash before there is clarity on its PR24 regulatory position, if it appeals its final determination.

Reporting its results to 31 March 2024 last week, the company shared that it had £1.8bn of liquidity at 30 June, sufficient to fund its operations until the end of May. Should it opt to refer its PR24 final determination, to be issued in December, to the Competition and Markets Authority, the case could still be in train in May. Thames’ ability to raise new equity will be hindered until there is clarity on its regulatory settlement. 

Chief executive Chris Weston said this situation was “well understood” at Thames, but that this “absolutely does not” rule out the option of a CMA appeal.

Instead, Thames plans to use mitigations including trying to extend its liquidity runway and doing more to “live within our means”. He continued: “For too long this business has been overspending against its allowances and, as is evident, this is not a sustainable business model.”

He shared that in his view, ‘living within its means’ is a “two way street”: Thames must become more efficient, including in how it deploys capital, balances costs, reduces bad debt and minimises costs when its assets fail; but Ofwat’s cost allowances must also recognise that operating in London with an ageing asset base is a “different prospect” to operating elsewhere.

Chief financial officer Alastair Cochran said the year’s accounts had been prepared on a going concern basis given committed liquidity; Thames’ intention to extend the liquidity runway; its intention to pursue all options to secure equity from new or existing investors following receipt of the PR24 draft determination; the risks associated with failing to comply with the company’s Instrument of Appointment; and the consequences of a trigger event in relation to its forecast financial covenant ratios in the 2024/25 financial year. “However, there exist material uncertainties in relation to the going concern basis adopted in the preparation of the financial statements,” he conceded.

In the longer term, Thames needs new equity to support its expanded investment programme,  especially following its existing shareholders’ March 2024 decision not to inject £500m. Seeking new equity, Weston said, is the company’s focus now and that it is looking at a “broad church” of prospects.

He said Thames had taken initial soundings which indicate there is interest in the market from prospective equity investors. It will engage more following the DDs, ramping this up in autumn ahead of the FDs. Gearing will likely have to increase in the short term, with credit rating downgrades and forecast trigger events in its 2024-25 financial covenants restricting Thames’ ability to pay dividends and incur new debt.

Weston noted special administration remained a possibility down the line, but in his view was “not in the interests of any of our stakeholders or the UK taxpayer.”

There was positive news from the reporting year. Weston said: “The challenges we face are well documented, but our operational and financial performance for the last year show good progress, and these positive results provide the right foundations on which to build and improve.”

Thames highlighted the following:  

a) Financial performance 

• Underlying profit after tax of £140m, an improvement of £272m. Cochran said this was Thames’ first profit for four years.

• 10% growth in underlying revenue to £2.4bn reflecting an inflation linked increase in bills. 

• Underlying EBITDA of £1.2bn, up 21% reflecting higher revenue and operating cost discipline.

• Record capital expenditure of £2.1bn, up 18% as Thames continues to increase investment and improve network resilience. 

• Total liquidity of £2.4bn as at 31 March 2024. 

The accounts also showed Thames paid £195.8m dividends in the year: £37.5m in October 2023 to Kemble for it to service external debt obligations, and £158.3m in March 2024 for pension contributions and to settle amounts owing for group relief surrendered. For the seventh year in a row, no distributions were earned by Kemble shareholders. After the year end, credit rating downgrades by Moody’s and Standard & Poor’s resulted in the Group entering a licence cash lock-up, which restricts the payment of future dividends without the prior approval of Ofwat.

b) Operational performance and turnaround plan

• 18% reduction in lost-time injuries.

• Significantly improved performance in the water quality compliance risk index, with a score of 1.43 from 10.96 in FY23.

• 15% reduction in supply interruptions, after a change to the way mains repairs are managed.

• Lowest ever annual average leakage level of 570.4ml/day, a year-on-year reduction of 7%.

• Increase in pollutions to 350 (2022: 331), driven by a 40% increase in average rainfall. The number of serious pollutions decreased by 18%.

• Water and wastewater complaints down 29% and 19% respectively, although total complaints were up 10% driven by customer billing complaints.

Weston also shared that his number one priority was and always will be the “safety and well-being of colleagues and customers”. More broadly he said: “My priorities fall into four areas: our people, our customers, our performance and our assets. Each priority has clear areas for improvement, including health and safety, pollutions, leakage, and customer service…To successfully execute these priorities there is a requirement for clearer accountability and a more effective organisation and, in my first few weeks, I streamlined the executive team. I created a new chief operating officer role, bringing together operations, asset management, engineering and capital delivery, to better manage our assets from inception to retirement, align goals and break down silos. Furthermore, I also introduced an enhanced governance structure, more focused on operational performance, including monthly business reviews.”

A final determination that is both financeable and investable is critical for Thames. Weston said the draft determination, which was published two days after the results were produced, was “not an end point” and that Thames was committed to continuing to engage with Ofwat to agree a determination that will deliver improvements for customers and the environment, and give investors the opportunity to earn a fair return. 

Ofwat showed little forbearance for Thames in its DDs. Business plan totex was cut by £5bn to £16.9bn, 20% of which will be conditional (£3.3bn). Bills rises were held to £99, compared to the business plan view of £191. Outcome expectations were stretching, including a 64% cut in storm spills and a 19% cut in leakage, and Thames is subject to the normal penalty regime.

Ofwat also placed the company into a newly hatched Turnaround Oversight Regime, under which Thames must provide a Financial Resilience Plan, Delivery Action Plan and re-evaluate its turnaround plan. 

Thames' response was modest, emphasising the opportunity for further engagement.