David Owens, who yesterday stood down as Chief Executive Officer of Thames Water, has said that the company is facing “significant challenges” in the continuing recession.

Commenting in the group’s latest interim results for the six months to 30 September, Mr Owens said:

“The continuing recession presents significant challenges and shows that we are not operating in a risk-free environment.…..the regulatory model in the economic downturn means our revenues are lower than expected when Ofwat set the plan at Final Determination 2004 and the new financial landscape means that raising new debt is more expensive than in previous years. These factors, along with the increase in bad debt, will make it more difficult to fund the essential investment in the network that is required to meet our customers’ needs”.

Despite the warning of the looming funding gap, the business continued to deliver strong financial performance in the six months to 30 September 2009 with operating profit increasing by 2.7% to £331.8m, compared to £323.2m for the six months to 30 September 2008. Pre-tax profit rose 15 per cent for the period, up to £225.5 million. Turnover also rose to £805.6 million, compared to £776.7 million for the same period in 2008. Thames Water described its financial performance as “steady”.

The capital expenditure programme, at £379.2m for the six month period, was on target for the year. Thames said the programme was expected to fall in the last year of the Asset Management Period (AMP4) after approaching £1 billion for each of the last two financial years.

Mr. Owens described the latest six months as “characterised by further improvement in operational performance, with leakage levels continuing to reduce as a result of further investment in replacing Victorian mains in London”. For the year to 31 March 2009 the Company outperformed the leakage target for the third year running, despite a severe winter which caused a major increase in burst pipes. Due to ongoing capital works including a continued programme of mains replacement and pressure management, the leakage level has continued to fall during 2009 and is currently at the lowest ever recorded level.

The company saw increases in power costs and an increase in bad debt expenditure (up 67% to £16.2m) compared to the first half of last year, which it said had been “mitigated by continued emphasis on driving operating efficiencies”. Principal risks and uncertainties The Company said it was exposed to a number of potential risks and uncertainties that could have a material impact on its long-term performance which included:

• PR09 Final Determination
• Employee pension scheme funding
• Failure to maintain adequate funding arrangements
• Failure to meet regulatory targets
• Impact of the economic downturn
• Future changes in laws or regulations
• Failure of a major asset
• The effects of climate change and long-term changes in weather patterns
• Shortage of skilled labour
• Managing increased competition in the water industry