Thames Water Utilities Limited Annual Financial Report

RNS Number : 6506V

Thames Water Utilities Limited

09 July 2024

 

Thames Water Utilities Limited
 Annual Results for the year to 31 March 2024

Tuesday 9 July 2024

"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.

"We've delivered year-on-year improvements in our key water metrics, with leakage at its lowest ever level, and we're supporting more customers through our social tariffs. Revenue, EBITDA and operating cash flow all grew strongly, supporting a record £2 billion of investment in our infrastructure that will ultimately improve asset resilience, environmental performance, and customer service. Our teams should be immensely proud of what they've delivered during a difficult year and for maintaining focus on what matters most to our customers.

"We have set out an ambitious business plan for the next five years, and I believe that with consistent leadership and priorities, time and resources, and the appropriate regulatory determination, we will turn around this business and make it perform for all our customers, the environment and our wider stakeholders."

Chris Weston, CEO of Thames Water

Overview of financial performance                                    

·    Underlying profit after tax of £140 million, an improvement of £272 million

·    10% growth in underlying revenue to £2.4 billion reflecting an inflation linked increase in our charges for water and wastewater services

·    Underlying EBITDA of £1.2 billion, up 21% reflecting higher revenue and operating cost discipline

·    Record level of capital expenditure of £2.1 billion, up 18% as we continue to increase investment in our ageing assets and improve network resilience

·    Total liquidity of £2,456 million as at 31 March 2024

Operational performance and progress delivering our turnaround plan

·    18% reduction in lost-time injuries

·    Significantly improved performance in the water quality compliance risk index, our regulatory measure of water quality, with a score of 1.43 from 10.96 in FY23

·    15% reduction in supply interruptions, after a change to the way we manage mains repairs

·    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 up 10% driven by customer billing complaints

 

Outlook

As at 30 June 2024, our liquidity was £1.8 billion, sufficient to fund our operations for the next 11 months to the end of May 2025.

Following the Draft determination and our response to Ofwat we will be engaging with potential investors and creditors to seek new equity and to extend our liquidity runway.  Any equity process is not expected to conclude until after the Final Determination.

In the meantime, Thames Water will continue to invest to meet its regulatory and environmental obligations and to improve the operations of the business as we execute our Turnaround Plan.

 

Financial performance

Year ended	31 March 2024								31 March 2023
£m	Underlying		Exceptional		BTL1		Total		Underlying	Exceptional		BTL1	Total
Revenue	2,401.4		-		116.8		2,518.2		2,180.7	-		84.5	2,265.2
EBITDA	1,208.0		(43.9)		116.6		1,280.7		1,001.8	-		84.4	1,086.2
Profit / (Loss) after tax	139.8		(151.8)		87.4		75.4		(132.3)	-		102.2	(30.1)
Capital investment	2,083.7		-		-		2,083.7		1,769.7	-		-	1,769.7
Operating cash flow	1,382.0		-		(0.7)		1,381.3		1,114.4	-		1.8	1,116.2
Free cash flow	(613.5)		-		(0.7)		(614.2)		(491.0)	-		1.8	(489.2)
Dividends paid	(195.8)		-		-		(195.8)		(45.2)	-		-	(45.2)
Net debt	(15,247.0)		-		-		(15,247.0)		(13,958.6)			-	(13,958.6)
Senior gearing							80.6%						77.4%
Senior PMICR							1.76x						1.60x

¹   Our financial statements include the amounts billed in relation to the construction of the Thames Tideway Tunnel, which are passed to Bazalgette Tunnel Limited ("BTL"), the independent company responsible for the construction of the tunnel. As this money is not retained by us, we exclude it from our underlying results.  Further information about the BTL arrangement can be found below.

Investor enquiries

Sarah Davies - Head of Investor Relations
David Gregg - Director of Corporate Finance
 [e-mail]

Media enquiries

Suvra Jans - Head of Media Relations
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07747 640 810

Simon Haynes - Senior Media Relations Manager

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07747 644 910

Chief Executive Officer Statement
Chris Weston

It continues to be a difficult time for Thames Water as we address the challenges facing our business. Increasing our financial resilience and securing an investible PR24 plan is a critical priority for the business. Notwithstanding that, it's business as usual for the teams on the ground, as they continue to supply our services and remain focused on the delivery of our three-year Turnaround Plan: making progress in our underlying operational and financial performance.

During my first few months, I've been able to get out to see our operations and it's quite incredible what we do every day. We deliver 2.5 billion litres of safe drinking water to 10 million customers and treat 5.1 billion litres of wastewater for 16 million customers every single day. And our service is provided over an extensive infrastructure that is underinvested in, tired and up to 150 years old, with the majority of it in one of the most congested cities in the world. Despite this, I've been impressed by the commitment and passion of our people, who work tirelessly every day to provide our service and to do their best to protect the environment. I am very grateful for their resilience and all they do; something they can be immensely proud of.

Turning to our financial performance; we delivered a material improvement in underlying results in 2023/24 with revenue up 10% to £2.4 billion, EBITDA up 21% to £1.2 billion and profit after tax of £140 million. We also invested a record £2.1 billion in our infrastructure.

Looking forward, we are focused on improving our financial resilience and learning to live within our means.  In the short term, gearing is forecast to increase further to support our much-needed investment programme and following the decision by our shareholders not to provide a further £500 million of equity funding in March 2024.

This has resulted in credit rating downgrades and forecast trigger events in our 2024/25 financial covenants. These both restrict our ability to pay dividends in the future and incur new debt.

Consequently, and as previously announced, we are planning to seek new equity funding from investors following the receipt of our PR24 draft determination from Ofwat on 11 July. I continue to believe that a market led solution that increases financial resilience is in the best interests of all stakeholders, but it is dependent on securing a final regulatory determination that is deliverable, financeable and investable, as well as affordable for our customers.

Operational and environmental performance

We've made some clear improvements in water quality and supply interruptions since last year. In the water quality compliance risk index, our regulatory measure, we delivered our best performance in the regulatory period so far, after investment at key sites, including Hampton and Coppermills. We've also delivered a 15% reduction in supply interruptions, after a change to the way we manage mains repairs, and a significant improvement in unplanned outages.

Our performance in pollutions and sewage discharges is not where it should be or where we want it to be. The number of reportable pollutions increased during the year to 350 from 331. However, to provide some context, the Environment Agency is changing the way it categorises pollutions, which we're already starting to see in the numbers, with all pollutions falling into the three categories we report on rather than four. And pollutions are directly correlated to rainfall; in 2023, we saw 40% more rain than the year before, causing a spike in pollutions. The prolonged heavy rainfall also led to an increase in sewage discharges to 16,990 from 8,015. As part of our Turnaround Plan, we are prioritising targeted cleaning of the network to prevent blockages, the biggest cause of network pollutions. Blockage clearance also led to a significant reduction in internal sewer flooding.

In the year, we've reduced leakage by 7%, to our lowest ever level. However, we know we have more to do, and we've developed a new approach which tackles leak repairs by volume of leakage saved rather than the number of leaks fixed. This is also an area particularly susceptible to extreme weather and requires extensive infrastructure investment over many years.

While our performance commitment for customer service is Customer Measure of Experience (C-MeX) and our KPI is complaints, what I want to see first is that we're getting the fundamentals right - we want customers to be able to get through when they call, have their query resolved first time and know they're getting an accurate bill. We also need to be better at collecting the money that's due to us. Our bad debt levels are double the industry average, in part due to the transience of London's population, and must be brought under control. At the same time, we know there are many customers who need financial support and we're now helping around 360,000 households through our social tariffs.

My priorities

The success of Thames Water matters and I believe that with consistent leadership and priorities, time to deliver and investment, we can turn this business around and make it perform. 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 invest in our asset health, both the infrastructure we rely on to provide our services and our digital estate; and that we live within our means. For too long this business has been overspending against its allowances and, as is evident, this is not a sustainable business model. 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.

Looking ahead

Ofwat's final determination as part of its 2024 price review process will tell us how much money we can recover from our customers between 2025 and 2030; it is a critical enabler of our success, and speculation about the future of the company will inevitably intensify as we get closer to Ofwat's decision in December 2024. However, I look forward to working with everyone at Thames Water to increase our financial resilience and turn around this business, so we can deliver our key priorities and improve performance for customers and the environment.

 

Chief Financial Officer Statement
Alastair Cochran

Financial performance improved in 2023/24 with growth in revenue, profits and operating cash flow largely reflecting inflation-linked tariff increases, operating cost discipline and a reduction in net financing costs. During the year, we also delivered a record level of capital expenditure as we continued to ramp up investment in our infrastructure.

Our business plan for the 2025-30 price control period proposes investing significantly more than the current regulatory period to improve asset resilience, to deliver environmental improvements and to improve performance for our customers and the communities we serve. This relies on securing additional debt and equity funding.

The decision by shareholders not to commit new equity in March 2024, reflecting uncertainty concerning the outcome of the PR24 price review, has resulted in credit rating downgrades, a liquidity runway of c.11 months and forecast trigger events in our 2024/25 financial covenants.  These all highlight this near-term funding challenge.

The success and timing of securing the capital we need to finance our ambitious business plan, turnaround performance and increase financial resilience depends on securing a PR24 price determination that is both financeable and investable. We are therefore committed to continuing to engage with our regulators to agree a determination that will deliver improvements for our customers and the environment and give our investors the opportunity to earn a fair return on their investment.

 

Income statement

 

Year ended	31 March 2024				31 March 2023
£m	Underlying	Exceptional      items1	BTL2	Total		Underlying	BTL2	Total
Revenue	2,401.4	-	116.8	2,518.2		2,180.7	84.5	2,265.2
EBITDA	1,208.0	(43.9)	116.6	1,280.7		1,001.8	84.4	1,086.2
Operating profit	444.5	(43.9)	116.6	517.2		271.6	84.4	356.0
Net finance expense	(393.3)	-	-	(393.3)		(476.5)	-	(476.5)
Net gains on financial instruments	152.3	-	-	152.3		122.3	-	122.3
Net impairment losses	-	(118.9)	-	(118.9)		-	-	-
Profit / (loss) before tax	203.5	(162.8)	116.6	157.3		(82.6)	84.4	1.8
Tax	(63.7)	11.0	(29.2)	(81.9)		(49.7)	17.8	(31.9)
Profit / (loss) after tax	139.8	(151.8)	87.4	75.4		(132.3)	102.2	(30.1)

 

¹   Exceptional items are those charges or credits, and their associated tax effects, that are considered to be outside of the ordinary course of business by the Directors, either by nature or by scale. Exceptional items have been split out from our underlying figures to support users of the financial statements understand underlying performance of the business and separate this from those items which are outside of the ordinary course of business, thus enhancing the comparability and transparency of the financial statements

²  Our financial statements include the amounts billed in relation to the construction of the Thames Tideway Tunnel, which are passed to Bazalgette Tunnel Limited ("BTL"), the independent company responsible for the construction of the tunnel. As this money is not retained by us, we exclude it from our underlying results.

 

Revenue

Underlying revenue for the year ended 31 March 2024 increased by 10% to £2,401 million largely reflecting the increase in our charges for water and wastewater services. These annual tariff increases reflected high CPIH inflation, 'k' factors and adjustments to collect allowed revenue that had not yet been recovered in prior periods, offset by wholesale and retail outcome delivery incentives ("ODI") penalties. Including BTL, total revenue increased by £253 million in 2023/24 to £2,518 million.

Appointed revenue generated from our regulated activities was £2,428 million in the financial year, an increase of £202 million in line with tariff growth. Household and non-household revenue grew by 9% and 10% respectively, reflecting changing consumption patterns across our customer base. Other appointed revenue, which comprises income generated from bulk supplies and providing services to developers, also benefited from tariff increases.

Non-appointed revenue remained flat year-on-year at £22 million, with growth in off-network sewerage and other revenues offset by a decline in property searches.

EBITDA

Underlying EBITDA increased by 21% to £1,208 million largely reflecting higher revenue and other operating income, as well operating cost discipline.

Operating costs increased by £89 million (4%) reflecting cost control measures to mitigate the impact of inflation in our core cost base. Employment costs increased by £53 million driven by higher headcount as we invested to improve operational performance and service for our customers, as well as wage awards. Higher energy costs resulted in an £18 million increase in both power and raw material costs, whilst business rates increased by £15 million reflecting an uplift in rateable values. Other operating costs grew by 2%, significantly less than CPIH inflation.

Bad debt charges reduced by 2% to £89 million, equivalent to 4.3% of total household appointed revenue (2022/23: 4.8%). Of this, £49 million related to current year bills, which is a deduction to revenue. We are continuing to work diligently to improve bad debt performance and support our financially vulnerable customers who cannot afford to pay their bill in full, with 358,000 households benefiting from our social tariffs at the end of the financial year, a 17% increase in the year.

Other operating income increased by £41 million year-on-year driven primarily by land sales and compensation for the relocation of the Guildford Sewage Treatment Works.

Total EBITDA increased by £195 million to £1,281 million in 2023/24 and included BTL revenue and exceptional costs of £44 million incurred in relation to restructuring, transformation and severance costs.

 

Operating profit

Growth in EBITDA, combined with a £33 million increase in depreciation, amortisation and impairment as we continued to invest in our water, wastewater and digital infrastructure, generated a £173 million increase in underlying operating profit to £445 million.

Total operating profit increased by £161 million to £517 million, reflecting the impact of exceptional costs and BTL revenue in the period.

Profit before tax

Underlying profit before tax of £204 million compared to the underlying loss before tax of £83 million last year. The £287 million year-on-year improvement reflects higher operating profit and net gains on financial instruments, as well as a reduction in net finance expense.

Thames Water uses financial instruments to hedge financing risk and reduce the risk of adverse movements in financial markets. Changes in interest, inflation and foreign exchange rates, together with cash settlements, generate changes in the balance sheet value of these financial instruments which are accounted for as gains or losses that impact profits. This year, changes in expectations for interest rates and inflation, the appreciation of Sterling, higher own credit spread, a debt repurchase and loan extensions all contributed to a £30 million increase in net gains on financial instruments.

In addition, our net finance expense decreased by £83 million to £393 million largely reflecting lower accretion on borrowings and capitalised borrowing costs, partially offset by higher net interest. Total profit before tax for the year was £157 million, an increase of £155 million compared to last year. This includes the impact of an exceptional net impairment loss for the period of £119 million reflecting an expected credit loss provision on intercompany loans receivable recognised in accordance with IFRS 9.

Tax

During this financial year, we paid £287 million to HMRC in business rates, PAYE, National Insurance Contributions and other taxes. Of this, £179 million was incurred directly mostly through business rates, £98 million was collected and paid on behalf of our employees, and £10 million was incurred through indirect taxes such as the Climate Change Levy, Landfill Tax and Insurance Premium Tax. Consistent with prior years, the Group has not paid any corporation tax due to allowable tax deductions for interest costs and capital investment.

The Group incurred an underlying tax charge of £64 million in the year, comprising a current tax credit of £31 million and a deferred tax charge of £95 million. The current year tax credit comprised a charge to cover payments for group relief, more than offset by a credit to reflect the sale of prior year tax losses to other group companies. The deferred tax charge largely related to the decrease in carrying value of the deferred tax asset following movements in the fair value of financial derivatives in the year.

The total tax charge was £82 million in the financial year, a £50 million year-on-year increase mainly due to tax being payable by BTL.

 

Profit after tax

Underlying profit after tax was £140 million in the period, a £272 million improvement compared to the loss after tax reported last year.

Total profit after tax was £75 million for the year ended 31 March 2024, an increase of £105 million compared to the prior period.

Capital investment

During the year, the Group invested £2,084 million in its infrastructure, including capitalised borrowing costs. The 18% year-on-year increase reflected the planned increase in investment in our infrastructure in the current AMP7 price control period to increase resilience in our network and help mitigate the dual impacts of climate change and population growth.

The record level of capital expenditure in the financial year included: £582 million invested through our in-house Capital Delivery vehicle on major programmes including water distribution mains replacement and rehabilitation, and the installation of new water trunk mains in London and the Thames Valley; £238 million invested in our water network to reduce leakage and improve our trunk main network; £169 million invested in large projects, including upgrading our major sewage treatment works at Beckton, Mogden, Greenwich and Crossness; £25 million invested to connect our network to the Thames Tideway Tunnel, including the Beckton Inlet works; and £84 million invested in our metering programme.

Pensions

As at 31 March 2024, the total net IAS19 accounting pension deficit for the Group's two independently administered defined benefit schemes, the Thames Water Pension Scheme ("TWPS") and Thames Water Mirror Image Pension Scheme ("TWMIPS"), was £119 million. The £57 million year-on-year decrease was due to actuarial gains driven by changes in actuarial assumptions occurring across all industries, as well as £49 million of Company contributions made during the year into both schemes. As part of the triennial valuation dated 31 March 2019, a recovery plan was agreed with the trustees aimed at reducing the deficit to zero by 2027 by making regular contributions and deficit repair payments.

The latest triennial valuations at 31 March 2022 have been prepared and the TWMIPS valuation was agreed in March 2024. Discussions are continuing with the Trustee and the Pensions Regulator to complete the triennial valuation for TWPS, which is now significantly overdue.

Cash flow statement

Year ended			31 March 2024			31 March 2023
£m	Underlying			BTL	Total		Underlying	BTL	Total
Operating cash flow	1,382.0			(0.7)	1,381.3		1,114.4	1.8	1,116.2
Cash capex	(1,995.5)			-	(1,995.5)		(1,605.4)	-	(1,605.4)
Free cash flow	(613.5)			(0.7)	(614.2)		(491.0)	1.8	(489.2)
Net interest (paid) / received	(143.1)			-	(143.1)		42.8	-	42.8
Repayments of loans by parent	-			-	-		444.3	-	444.3
Cash inflow from financing activities	271.3			-	271.3		1,458.6	-	1,458.6
Dividends paid	(195.8)			-	(195.8)		(45.2)	-	(45.2)
Net cash (outflow) / inflow	(681.1)			(0.7)	(681.8)		1,409.5	1.8	1,411.3
Gross debt					(16,528.2)				(15,794.9)
Cash and cash equivalents					1,281.2				1,836.3
Closing net debt					(15,247.0)				(13,958.6)

 

Underlying operating cash flow increased by £268 million to £1,382 million due to higher EBITDA, a reduction in working capital and proceeds from the sale of group tax relief. This partly funded the Group's capital investment programme, interest and dividend payments, with the balance being funded by debt issuance and cash.

Net interest paid of £143 million in the year (excluding capitalised interest) represents a £186 million increase versus the £43 million net cash received reported last year, mainly due to the impact of new debt issued at higher rates of interest and a reduction in interest received on swaps and inter-company loans. Net cash interest paid for senior covenant calculation purposes was £312 million, a £77 million increase year-on-year.

These cash flows, including dividends paid, resulted in an underlying net cash outflow of £681 million in the year. The net cash outflow was £682 million, reducing cash and cash equivalents held at 31 March 2024 to £1,281 million.

Gearing and interest cover

The net cash outflow for the year, together with non-cash changes to the carrying value of borrowings and leases (consisting of accrued interest and debt accretion), increased statutory net debt to £15,247 million, a year-on-year increase of £1,288 million. Net debt on a covenant basis (as defined in Note 19 to the consolidated financial statements), was £16,071 million at 31 March 2024.

The increase in net debt was accompanied by a £1,002 million increase in Regulatory Capital Value to £19,947 million as at 31 March 2024. This resulted in senior gearing increasing to 80.6%, below the covenant event of default threshold of 95.0%. At the same date, our Post Maintenance Interest Cover Ratio ("PMICR") was 1.76x, above the minimum Trigger Event covenant requirement of 1.10x.

PMICR measures the amount of underlying cash generated by operating activities of the Company, adjusted for RCV depreciation, relating to the interest paid on the Group's debt. This ratio is a key covenant set by our lenders, and in modified forms, also used by credit rating agencies as part of their analysis when determining credit ratings.

Under the terms of its Common Terms Agreement, Thames Water is required to publish forecast financial covenant ratios for the next two financial years. Following the decision by shareholders not to commit new equity in March 2024, the Board has reviewed whether it is reasonable to assume that new equity will be received within the current 2024/25 financial year for the purposes of calculating these forecasts. This review also considered delays in the PR24 price review announced by Ofwat, the consequential impact on the timetable for engaging equity investors, and that new capital is dependent on securing a financeable and investable final determination.

The Board has concluded that although it is possible that equity will be received by 31 March 2025, this should no longer be assumed for financial covenant forecast calculation purposes. Consequently, the compliance certificate to be submitted to the Security Trustee in July 2024 shows non-compliance of certain forecast ratios for gearing and interest cover with Trigger Event thresholds. This places restrictions on the Group's ability to incur debt, pay dividends, and make payments to associated companies, and requires Thames Water to prepare a remedial plan for our lenders.

 

Credit ratings

Long term rating	Corporate Family	Class A	Class B
Moody's	Baa3 (negative outlook)	Baa2 (negative outlook)	Ba3 (negative outlook)
Standard & Poor's	-	BBB- (negative outlook)	BB (negative outlook)

 

Under the terms of our Instrument of Appointment, the Group is required to maintain two investment grade credit ratings, as assigned by external rating agencies. This supports our ability to access efficiently priced debt across a range of markets to fund our investment programmes, whilst keeping bills affordable for our customers.

Our credit ratings were downgraded by Moody's and Standard & Poor's in April 2024 following the announcement that £500 million of new equity that had been anticipated by 31 March 2024 would not be provided by Thames Water's shareholders. As a result of these downgrades, the Group is now operating in a licence cash lock-up, which restricts certain payments to associated companies, including dividends, without the prior approval of Ofwat.

A future downgrade to a sub-investment grade credit rating could, depending on the circumstances and the approach of Ofwat, result in a breach of the Company's Instrument of Appointment and possibly a consequent event of default under the terms of the Group's financing arrangements.

The Group aims to secure a PR24 regulatory determination that is affordable, deliverable and financeable. Accordingly, our PR24 business plan submitted to Ofwat targets credit ratios consistent with a long-term investment grade credit rating of Baa1/ BBB+. Following receipt of the draft PR24 determination in July 2024, the Group intends to pursue all options to secure equity investment from new or existing shareholders.

Financing investment

We finance our investment in our water, wastewater and digital infrastructure through a combination of operating cash flows, debt issuance and new equity. Our funding strategy focuses on diversifying sources of finance, pre-funding maturities and maintaining a balanced debt maturity profile. The average debt maturity at the end of the year was 12 years. In the year, the Group completed the following new debt issuance and debt extensions:

·    a £300 million Class A bond due 2040 was issued in October 2023; 

·    a £275 million Class A bond due 2031 was issued in January 2024;

·    a £575 million Class A bond due 2044 was issued in January 2024. 

·    a £100 million Class A RPI loan agreement originally due 2025 and with accreted principal of £145 million was extended to 2033 in October 2023 

·    a £125 million Class A RPI loan agreement originally due 2026 and with accreted principal of £180 million was extended to 2033 in October 2023

In addition, a total of £164 million was drawn from loan facilities signed in December 2022, consisting of a £99 million Class A loan due 2029 which was fully drawn in October 2023 and a £65 million Class B loan due 2027 which was fully drawn in October 2023.

In January 2024, £186 million of a £500 million Class A bond due to mature in June 2025 was bought back following a tender offer to bondholders.

Total borrowings including accrued interest, lease liabilities and bank overdrafts increased by £733 million to £16,528 million as at 31 March 2024. Of this, £16,106 million comprised bonds, secured bank loans and private placements.

We also continue to tie the interest cost on our main £1,646 million Revolving Credit Facility (RCF) to our sustainability performance, via our participation in the annual Infrastructure GRESB assessment. GRESB is an independent external ESG benchmark that assesses the sustainability performance of real estate and infrastructure portfolios and assets worldwide. Our latest GRESB score is 91 out of 100, which, while slightly lower than last year's 92, still represents an excellent outcome and triggers a small reduction in the standard margin paid on the RCF. We promised to pass on any financial gains to charitable causes, and as a result they will benefit by over £106,000.

Cost of interest

The Group uses derivative financial instruments where appropriate to manage the risk of fluctuations in interest rates. As at 31 March 2024, interest rates for 35% of our gross debt were fixed, 56% were index linked to RPI, and 9% were floating on a post swap basis. Overall, the Group's effective cost of interest including accretion on index-linked debt was 5.8%; the effective cash cost of interest was 2.0%.

During the year, £58 million of accretion was settled on index-linked swaps when falling due in August 2023 and September 2023, and £101 million of accretion was prepaid on index-linked swaps (£94 million was paid to early settle £101 million accretion on index-linked swaps, the difference of £7 million reflecting the discount for early repayment), bringing the settlements forward to September 2023 from October 2024 and February 2025.

Liquidity

As at 31 March 2024, the Group had total liquidity of £2,456 million, comprising available cash of £1,285 million and undrawn committed bank facilities of £1,171 million.  This excludes £550 million of undrawn Debt Service Reserve and Operation and Maintenance Reserve liquidity facilities, which can only be drawn in limited circumstances.

The Board has previously announced its intention to seek sufficient equity investment to finance operations for the period ended 31 March 2030 from investors following publication of the PR24 Draft Determination on 11 July 2024. In addition, Class A revolving credit facilities and term loans totalling £2.2 billion were fully drawn after the year end, thereby significantly increasing the amount of cash held on balance sheet. Consequently, as at 30 June 2024, the Group had total liquidity of £1,809 million, comprising available cash of £1,513 million and undrawn committed bank facilities of £296 million, providing approximately 11 months of liquidity from the date of signing the financial statements.

Going concern

In assessing whether the Group and Company have adequate resources, for a period of at least 12 months from the date of approval of the financial statements, the Directors have taken a number of factors into account including its committed liquidity; its intention to take actions to extend the Group's and Company's liquidity runway, which could be achieved through a combination of actions including securing equity or debt funding, implementing cash conservation measures that do not threaten the Group's and Company's statutory duties, or securing creditor support; the need to secure a PR24 determination that is affordable, deliverable, financeable and investable; its intention to pursue all options to secure equity investment to fund the Group's PR24 business plan 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.

Accordingly, the Directors have concluded it is reasonable to assume that actions can be taken such that the Group and Company have adequate resources, for a period of 12 months from the date of approval of the financial statements, to continue operations and discharge its obligations as they fall due. However, there exist material uncertainties in relation to the going concern basis adopted in the preparation of the financial statements given:

●    the Group and Company do not have sufficient committed liquidity for a period of 12 months from the approval of these financial statements and our ability to extend our liquidity runway beyond the assessment period is not wholly within our control whilst a Trigger Event has occurred or prior to conclusion of the PR24 price review; and,

●    a future downgrade to a sub-investment grade credit rating or a failure to meet our legal obligations could, depending on the circumstances and the approach of Ofwat, result in a breach of the Company's Instrument of Appointment and possibly a consequent event of default under the terms of the Group's financing arrangements.

 

Dividends

TWUL settled a total of £195.8 million in dividends in the year comprising:

·    two interim dividends totalling £37.5 million in October 2023, which enabled Kemble Water Finance Limited and its financing subsidiary to service external debt obligations through to 31 January 2024

·    two interim dividends totalling £158.3 million in March 2024 to enable Kemble Water Eurobond plc and Thames Water Limited to settle amounts owing to the Company for group relief surrendered, and Kemble Water Eurobond plc to make pension contribution payments to the Thames Water Pension Scheme and Thames Water Mirror Image Pension Scheme defined benefit schemes on behalf of the Company.

For the seventh year in a row, no distributions were earned by our external shareholders, who own shares in our ultimate parent company, Kemble Water Holdings Limited.

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.

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