Bazalgette Tunnel Ltd, trading under the name Tideway, has progressed to the system commissioning stage of the Tideway Tunnel delivery, according to its Annual Report and Accounts for 2023/24.
Tideway began operating as an independent regulated water company in August 2015, when Ofwat awarded Bazalgette Tunnel Ltd its Licence to design, build, commission, maintain and finance the Thames Tideway Tunnel.
Tideway has an alliance comprising Tideway, Thames Water, the Programme Manager (PM), three consortia known as the Main Works Contractors (MWCs) and a System Integrator Contractor (SIC) who work closely with Thames Water and their team. The water company is responsible for important elements of the project and will ultimately operate the system.
Financial performance
Tideway said it has achieved all its financing priorities for the year, including raising £250 million of additional funding in the form of a green private placement which additionally strengthens liquidity.
Tideway currently benefit from 33 months of liquidity which covers cash needs up to Handover and even a year after that. The company also continues to benefit from a £160 million revolving credit facility (RCF) which remains undrawn.
Following the latest £250 million funding deal which settled in October 2023, Tideway’s total committed debt funding stands at £3,417 million and comprises of £3,257 million of long-term debt all of which has now been drawn (the last deferred bond for £66 million settled in May 2024) and the £160 million undrawn RCF.
Net debt at 31 March 2024 was £3,670.5 million, which was £383.5 million higher than the £3,287.0 net debt at 31 March 2023.
At 31 March 2024, the Company’s total borrowings were £4,760.1 million being £922.7 million of shareholder loans and £3,837.4 milllion of other borrowings which include third party borrowings and intra group debt. Tideway has sufficient liquidity to cover project costs to Handover and beyond.
The report says Tideway’s multi-format debt platform supports the raising of long-term debt via structural enhancements that include a bankruptcy-remote structure and a package of covenants and restrictions protecting cash flows. The debt platform includes a multi-currency bond programme, which is listed on the regulated sustainable market of the London Stock Exchange.
Tideway debt covenants remain in line with itsd financing plan and fully compliant with its financing agreements, with Net debt/ Adjusted RCV (gearing) at 68.7 per cent (trigger level is 70 per cent, default level is 80 per cent) and Interest Coverage Ratio at 13.1x (trigger level is 1.3x, default level is 1.1x) as at 31 March 2024.
The cost estimate is currently £4.5 billion which is a one per cent increase from the previous year. This includes the impact of reaching commercial agreement with two of the three main works contractors and forecasting the impact of prolongation on indirect costs. Tideway says it remains confident that the impact on customer bills will remain well within the pre-Licence award estimate of £20-25 (in 2014/15 prices).
The EAC forecast remains at £4.5 billion in line with last year’s report.
All bonds issued to date are green and are listed in the London Stock Exchange Sustainable Bond Market. Tideway’s total green debt issuance stands at £2,157 million, which includes the 18 green bonds totalling
£1,832 million and £325 million of green US private placements. The £160 million RCF is structured as a sustainability-linked loan which includes a rebate linked to a sustainability key performance indicator (KPI) of meeting at least 85 per cent of the live legacy commitments.
The sustainable financing strategy is supported by the Sustainable Finance Framework which was last updated in 2023.
At Licence Award shareholders committed a total of £1,274 million in the form of £509.7 million in equity and £764.5 million as shareholder loans. This amount has been fully injected into Tideway and investments are being debt financed now. As a result, gearing is increasing to Tideway’s target capital structure as it delivers the investment programme and risks are gradually retired.
2023/24 report charts Tideway’s transition from civil engineering project to operational utility
The 2023/24 report charts a different year for Tideway as it began to transition from a civil engineering project to an operational utility. It details final construction milestones; the installation of mechanical and electrical networks; and preparations for commissioning.
Underground construction was completed on 27 March 2024 when the final shaft was ‘capped off’ at the Abbey Mills Pumping Station site near Stratford in east London, marking the completion of the main construction of the Thames Tideway Tunnel.
This was closely followed on 13 May, when teams from Tideway and Thames Water completed the vital connection of the new infrastructure with the Lee Tunnel – when the super sewer became an integral part of London’s sewerage network, creating a single London Tideway Tunnels system and marking the start of the commissioning phase.
System Commissioning started ahead of Business Plan forecast
Following better than expected secondary lining rates in both of the East tunnels, the performance of secondary lining has meant that preliminary system commissioning was able to commence at the end of April 2024, ahead of the 2023/24 Business Plan forecast.
After testing of the mechanical and electrical equipment at the worksites by the MWCs the SIC completes the connection of these sites to the overall London Tideway Tunnels (LTT) control system. All the elements of this system then undergo extensive testing in the dry before any sewage flows are received. Once this is complete, the final physical isolation is removed between the existing Lee Tunnel and the new Thames Tideway Tunnel. The CSOs along the Tideway Tunnel starting with the Abbey Mills CSO are then activated to the new LTT system.
The team have progressively integrated Tideway sites into the supervisory control and data acquisition (SCADA) system at Beckton and this will monitor and control the whole tunnel. A total of 15 of the 21 sites to be linked to the operational network control system were successfully completed, with the remainder planned for the first quarter of 2024-25. Additionally, secondary control rooms were installed and tested at three Thames Water sites, with cyber security penetration testing completed to confirm that the system is secure in preparation for coming into operation during system commissioning
Once these are all activated a series of storm tests are carried out in a gradually incremental manner over several weeks culminating in a 30-day period of automated operation. After this final test the tunnel is inspected, and the operation of the system handed over to Thames Water. At the Handover the MWCs’ activities will be complete, and the contractors will be demobilised. The expected Handover date could potentially be in advance of the target date of quarter two 2025/26, following better than expected secondary lining rates in both of the East tunnels.
System Acceptance period to last between 18 to 36 months
Handover will then be followed by the System Acceptance Period - a proving period of between 18 and 36 months in which the LTT will be operated across a variety of climatic conditions to demonstrate that it fulfils the project requirements.
Once this is complete, Thames Water will become responsible for maintaining the near-ground structures and assets. Tideway will retain responsibility for the shafts and tunnel structures and ensure the TTT is available to allow flow to pass to the Lee Tunnel. This involves inspecting the deep tunnels and shafts, which Tideway expect to do on a ten-yearly cycle, performing any maintenance as required.
Looking ahead to the next 12 months, Tideway needs to complete the activation of the new system, linking all sewage overflow points to the tunnel and then test it in different weather conditions. The company is working closely with Thames Water to commission the infrastructure and in 2025 will hand it over for operation as part of the wider regional network.
First major UK project to use Specified Infrastructure Project Regulations model to fund public infrastructure
Tideway is the first major UK project to use the government’s Specified Infrastructure Project Regulations (SIPR) model to fund public infrastructure. The Thames Tideway Tunnel’s innovative delivery model was established to attract private sector capital to finance infrastructure and deliver value for money to customers. It includes a bespoke regulatory framework, with a contingent Government Support Package (GSP), which recognises the unique nature of Tideway’s business.
The report states:
“Its resounding success in attracting private investment, securing competitive financing capital, and delivering this essential upgrade to London’s sewerage network is clearer now than it has ever been.”
According to Tideway, a key measurable of the SIPR model’s success is that, in 2015, before work began, the company gave an undertaking to the regulator and the government, that the cost of the project per household bill would not exceed £20-£25 per year (2014/15 prices). “Despite many challenges – not least a global pandemic – the cost is likely to be well within that range,” the report says.
On costs, the estimate at completion remains £4.5 billion and the impact on annual customer bills remains well within the range promised when the project began in 2015.
The report describes the GSP as a key feature of the Tideway model which enabled it to secure more favourable financing rates to the benefit of customers. Tideway said the GSP has not been required, and it does not expect it to be as it comes to the final stages of the project.
Since the Licence Award in 2015, the company’s shareholders have invested £1.3 billion. Close to half the total equity has come from UK investors, including many pension funds, giving 2.7 million UK pension holders a stake in Tideway.
Delivery model framework provides revenue stream during construction and operational periods
The delivery framework provides a revenue stream during both the construction and operational periods. Revenues are billed and collected by Thames Water from its wastewater customers and passed to Tideway. The delivery model is being considered for other major projects both in the water sector and beyond.
For the period until 2030, Tideway revenues are calculated according to the framework set out in its Licence, which is primarily based on a percentage return (2.497 per cent) on the regulatory value of the company (Regulatory Capital Value or RCV). From 2030, Tideway expect to be regulated in line with the rest of the water industry
Tideway has entered into long-term swaps with commercial banks to hedge the interest rate for tranches one to eight of the £700 million EIB loan and £70 million of the £300 million US Private Placement notes. These are all economic hedges, completed in previous financial years and no swaps were executed in 2023/24.
Prior to System Acceptance, Tideway will not generate distributable profits and as such it will not be able to pay dividends to its shareholders. As a result, during construction Tideway’s shareholders receive a cash return on their investment through a combination of payments of interest on the loan and partial repayments of the loans.
This mechanism was put in place during the Infrastructure Provider equity procurement process run by Thames Water and overseen by Ofwat and the UK Government. Tideway said this was “key to achieving the low cost of capital bid” by its shareholders and that ultimately, Thames Water’s wastewater customers benefit from the low cost of capital achieved through the procurement through a lower charge in their bills.
No distributions to the shareholders were paid in the year. £86. 6 million of shareholder loan interest was capitalised in the year and the shareholder loan now stands at £922.7 million.