A difficult macro-economic environment and a spike in leaks and bursts as a result of extreme drought have impacted Thames Water’s financial performance in the first half of the year, according to its latest set of results for the first six months of 2022/23 published this morning.

Revenues were up 3% to £1.1 billion (30 September 2021: £1,062 million), largely reflecting higher tariffs . The increase was driven by higher allowed revenue and a continued recovery in non-household consumption post the easing of Covid-19 restrictions, partially offset by lower consumption by household customers.

However, higher net operating expenses exceeded revenue and other operating income growth, with the increase primarily driven by:

• a £33 million increase in power costs driven by very high power price inflation
• a £24 million increase in employment costs as the firm invested to improve service to customers and were impacted by the temporary change in National Insurance rate
• a £12 million increase in raw materials and consumables, driven by a significant increase in chemical prices due to high energy costs
• a £6 million increase in other miscellaneous expenses, driven by higher inflation and volume increases across numerous categories of spend, primarily relating to costs for contracted services and repairs and maintenance of assets

Total profit before tax was £536 million in the first six months of the current financial year, an increase of £879 million compared to the prior period (30 September 2021: £343 million loss before tax). The year-on year increase arose principally from noncash net gains on financial instruments.

A profit after tax of £398 million was driven by net gains on financial instruments (2021: £581 million loss).

Record £808 million invested in assets to fund improvements and upgrades

Thames Water saw a record £808 million invested in assets to fund improvements and upgrades at sites including Beckton, Coppermills, Kintbury and Speen during the first six months of the year.

The company said a move to new intelligent client and capital delivery models to support investment had led to the doubling of Capital Delivery spend compared to last year as it ramps up its investment programme to increase asset resilience. Thames has also set up a new ‘asset health’ dashboard to support investment decisions in the most ‘at risk’ assets.

The company are also reporting strong shareholder support for its turnaround plan – in June, shareholders gave their unanimous approval to the revised business plan for the current AMP7 regulatory period. Thames said the new plan will see “a huge increase in investment” compared to the AMP7 final determination, with shareholders committing £500 million of new equity this year.

In addition, shareholders have once again agreed not to take dividends, so they can be reinvested- it is now five and a half years since they have received a dividend.

The shareholders have also set up a new Group of Ventures companies to maximise the potential of renewable energy generation and property development. Thames said it is already self-generating almost a quarter of its energy needs and the business is continuing to innovate to increase generation and reduce its reliance on the grid.

To maximise the energy generation potential of Thames and secure increased investment into the network, the shareholders, through the Kemble Group structure, have set up a new group of companies, which will be operational from 31 March 2023. The new companies will invest in energy projects, such as increased solar and property development.

Water performance metric hit by drought conditions

Commenting on operational performance during the period, Thames is reporting a deterioration in water metrics, including leakage and supply interruptions, due to prolonged hot summer leading to drought conditions across much of the UK.

The utility’s performance metrics, including leakage and supply interruptions, were significantly impacted with a 38% increase in mains bursts due to the hot weather and dry ground.

Other key performance highlights in the report include:

Cleaning up rivers

• On track for live sewage discharge alerts from all permitted locations - over 460 permitted locations by the end of December.
• Consultation on first 25- year Drainage and Wastewater Management plan completed
• Reduced internal sewer flooding by almost 60% and total pollutions by 5% year-on-year

Tackling leakage

• Increased activity to reduce leakage as drought in the region has major impact on water metrics
• Fixed over 30,700 leaks between April and September
• Repaired over 4,200 water mains (September 2021: Over 3,000)
• Used 23,600 acoustic loggers to detect 20.4 Ml/d of leakage and over 76,825 smart meters to fix 7.47Ml/d of leakage since the start of April 2022
• Cleaned over 850 km of sewers, as part of a proactive maintenance programme
• Cleared over 33,000 blockages which can potentially cause sewer flooding (September 2021: >36,500)
• Cleared over 2,700 blockages following detection by sewer level monitors
• Piloted smart waste and water tools such as Discharge Alert Monitor and low-cost small sewer monitors.
• Used drones to inspect sewers for the first time

Reducing reliance on grid energy

• Overall electricity consumption reduced by 4% to 400Gwh compared to the same period themprevious year
• Incorporation of new Ventures companies in the Kemble Group to increase energy generation and to provide possibility of increased investment in energy projects
• 143GWh of renewable electricity generated at operational sites with 133GWh used in-house, covering 22% of its energy needs

Improving operations

• Investment in critical, and vulnerable, water mains
• On track with major project to reline three 36” water mains in Seven Sisters
• Completed first stage of a major £45 million replacement of the Faringdon to Blunsdon water main
• Replaced 6,317 lead pipes increasing the total to 32,186 since 2020
• Secured bathing water status for Wolvercote stream in April 2022, the second UK river to be given the elevated status. Achieved through Oxford Rivers Project collaboration
• Continued rollout of progressive smart meter programme, installing and replacing 76,825 more meters, leading to a total of over 900,000 installed so far
• Laid 20 km of water mains, and a total of nearly 73 km since 2020

Describing its water cycle as “an energy intensive process” Thames said costs had risen to £112 million for the six months to September 2022, representing a 78% increase compared to costs of £63 million for the six months to September 2020.

On sewage discharges, the company said it is cooperating fully with both Ofwat’s and the Environment Agency’s ongoing investigations.

Turnaround Plan – CEO says “there’s still a long way to go”

Commenting on the results, CEO Sarah Bentley said:

“Our Turnaround Plan is necessarily stretching, and we’ve made some progress under each pillar of the plan in the last six months. That said, there’s still a long way to go as we move through year two of our eight-year plan and the unprecedented external pressure we’re facing is having an impact on our performance metrics.”

According to the Thames Chief, the company is already seeing early signs of the benefits critical organisational changes implemented over the last six months will bring. Thames launched a new regional operating model on 1 April 2022 which focuses separate operational teams on London and the Thames Valley and Home Counties. The utility has also brought the repair and maintenance of its water network in house, and by March 2023, will have moved all its customer-facing telephone teams to the UK.

However, she warned that aspects of operational performance had been adversely affected during the period, commenting:

“Despite fixing over 30,000 leaks in the first six months our leakage target is going to be really challenging to achieve this year. …

“Our water quality measure looks at potential risk and therefore helps identify areas of investment need. We’ve not achieved our target for this measure, with early warning sample failures at Hampton and Coppermills Water Treatment Works where we already have a programme of investment underway….

“As well as the drought, the huge spikes in energy prices and significant inflationary pressures have had an impact on the business. As a regulated company, we’ve absorbed most of the increased costs, thereby mostly protecting our customers from this inflation. However, higher costs have impacted our financial performance.”

While Thames has reduced internal sewer flooding by almost 60% and total pollutions by 5% year-on-year, she acknowledged that Thames’ serious pollutions performance was disappointing, saying the company had appointed new management to drive an improvement in this area.

1. Need for "urgent, radical, systemic reform" across the entire industry

Sarah Bentley said that while turning around the business was her most immediate priority, real change could only occur “if urgent, radical, systemic reform is made across the entire industry” with real change built around three key pillars:

2. Water placed at heart of planning regime

Drinking quality water shouldn’t be used to flush toilets and wash cars – instead rainwater from roofs and patios should be used. Water companies need to work as an industry with regulators, customers, developers and government to change the way new developments are approached

Reform the regulatory environment to encourage responsible, long-term investment into the sector

Water is not a short-term need, but the regulatory framework isn’t aligned with that thinking. "We should be looking way beyond five-year regulatory periods to be able to make the right, long-term investment decisions to secure resilience and water supplies."

3. New coordinated approach needed to expedite critical projects like the Thames Tideway Tunnel

The culmination of years of planning and collaboration, the Tunnel is pushing new frontiers in the financing and delivery of infrastructure projects of this scale. This approach could also work for a strategic reservoir to supply customers.

Click here to read the Interim Report in full