Our finances explained. October 2016

Transcription

1 Our finances explained. October 2016

2 About our finances. Steve Robertson Chief Executive Officer We are the UK s largest water and wastewater services provider, serving London and the Thames Valley, with the industry s biggest investment programme. Between 2015 and 2020, we plan to invest 4 billion in our infrastructure, to further improve our customer service and make our network and delivery of essential services more resilient. Alongside this massive investment, our customers still benefit from the third lowest combined bill in the UK. We ve invested, on average, more than 1 billion a year for the last 11 years to benefit customers. For just over 1 a day per household, we provide 2.6 billion litres of high quality clean drinking water and safely remove 4.4 billion litres of wastewater 24 hours a day, 365 days a year. To fulfil our commitments to our customers, shareholders, and the environment, our finances require careful management and we take pride in funding our company efficiently and securely. Due to the large sums of money involved, and the strict legislation and regulation we are required to follow, our financing can appear more complex than it is. Our finances explained has been designed to help you understand exactly how our finances work, using figures for the 2015/16 financial year. Steve Robertson Chief Executive Officer What we spend our money on Pages 4 6 Our customer bills Pages 8 9 Keeping bills low by bridging the funding gap for our investment programme Page 10 Our borrowings, credit rating and gearing Page 13 Our tax Page 14 Our profits and dividends Page 16 Where our dividends go Page 17 Our investment history Page 18 In 2015/16 we adopted the accounting framework called international financial reporting standards, or IFRS. Previously our figures were reported using UKGAAP. For more information please refer to page 98 of our 2015/16 annual report and financial statements. 2 3

3 What did we spend our money on in 2015/16? Here is a breakdown of our planned operational and capital expenditure for , taken from our company business plan. 4 1Net investment in our network 1,217 million This is the money we use to renew and improve our network and infrastructure, as part of our record investment programme. This investment is known as capital expenditure or capex. Our investment of approximately 4 billion between 2015 and 2020 will help us do some great things: Improve 881km of water mains, to reduce leakage by 59 million litres each day - the equivalent of nearly 24 Olympic-sized swimming pools Provide new mains and pumps to address population growth across our region Install 900,000 smart water meters which help customers monitor how much water they use and encourage them to be more water-wise Generate 33% of our own power from renewable sources Upgrade sewage treatment works across our region to reduce odour and protect the environment Enable our network to be connected to the Thames Tideway Tunnel 2Day-to-day operational expenses 940 million This is the money we use to operate and maintain our network, pay our employees, cover our energy costs and pay our technology bills. With a vast network of 90,000 miles of pipes and 450 treatment works, this money is used to help us ensure our business runs efficiently and we provide the best for our customers. These costs are known as operational expenditure or opex. Together, operational and capital expenditure are known as total expenditure, or totex. Our management of our totex is how we are assessed by the water regulator, Ofwat. 3Net financing costs, repayment of loans and dividends 595 million We borrow money from banks and other lenders, such as pension funds and insurance companies, to help fund our investment in our network. We keep customer bills low by borrowing debt on as favourable terms as possible and by spreading the repayment costs over a longer period. In 2015/16, we paid 268 million of interest on our debt. There was an increase of 71 million on the value of existing loans due to inflation, whilst we repaid 267 million of loans. We also pay a dividend to our holding companies, to pay for their debt obligations, and to shareholders when the company meets its targets. We plan to install 900,000 smart water meters by % 11% 11% 9% 7% 4% 4% 4% 19% Figures in 2015/16 prices Opex 4.67 billion Opex Employment and agency costs Infrastructure maintenance Power Rates Bad debt Employer pension contributions Insurance Consumables Other (Including IT costs) Totex Overall planned spend billion 48% 38% 11% 3% Capex 4.03 billion Capex Wastewater network network Interface work to the Thames Tideway Tunnel Retail 5

4 Some key expenses. Pensions We operate two pension schemes to support our employees during retirement where Thames backs the financial commitments. Their assets are held completely separate from those of any Thames group companies. Interest rate fluctuations and other factors change the amount of pension obligations (how much we have to pay to retired employees) and pension assets (the assets that support our ability to make those payments) we have. Like many large companies, this has caused us to develop a pension deficit, which is valued every three years by an independent pension trustee. The size of the deficit can go up and down. Between March 2015 and March 2016, our pension deficit reduced by around 90 million to 260 million, partly as a result of financial market movements and partly due to our deficit repayment contributions. In total, we paid 45.6 million into our pensions relating to 2015/16, which included both regular contributions and deficit repair payments. This is part of our recovery plan to sustainably reduce our pension deficit to zero. The 2016 triennial valuation of our pensions is currently underway. Bad debt We face the continuing challenge of ensuring customers pay their water bills, and a persistent failure to pay can result in bad debt most of this customer debt actually comes from those who choose not to pay, rather than those who can t. For us, approximately 13 a year is added to every customer s bill to account for those who don t pay. This is hugely unfair and we have been implementing effective ways to discourage a refusal to pay, and actively support those who genuinely can t (see page 8). For example, from 2016/17, refusal to pay is being linked to a customer s credit rating and we have seen the benefit of higher collection rates. Power To reduce our reliance on the grid and the significant costs associated with powering our operations, we ve set ourselves an ambitious target of self-generating 33% of our energy needs by We re already producing 14.9% of our own energy from sewerage and are using more solar power, including from Europe s largest floating solar park on our QE2 reservoir. This, of course, helps us to reduce our carbon footprint. For 2015/16, we paid 45.6 million into our pensions. Europe s largest floating solar panel array installed on our QE2 reservoir. 6 7

5 Our bills. Offering value for money We provide water and wastewater services for an average of just over 1 per day per household. Our combined bills remain the third lowest in the UK and, excluding the impact of inflation, they will not increase before We keep our bills low through a combination of factors including: Efficient operations and investment. Operating our network efficiently drives down unnecessary costs. Low-cost financing. We borrow money in competitive markets to secure low-cost debt. Investment allowances. Through the capital allowances scheme we are able to keep our bills 12 lower than they would otherwise be (further detail on page 14). Helping our customers We offer a range of options to help our financially vulnerable customers, including two social tariffs (watersure and watersure plus), a range of payment plan options, free meter fits, water efficiency freebies, water direct and our customer assistance fund. We are ahead of our target to move around 37,000 customers onto the social tariffs by In 2015/16 we gave a total of 4.4 million in grants to customers, via our customer assistance fund, helping 5,206 customers with their water debt. Setting our bills Making our bills affordable, while setting them at a level that enables us to meet our commitments, is something we need to get right. We consult with our customers at length about what they value most from Thames and what they are willing to pay for. We also receive independent challenge from representative bodies such as our customer challenge group (CCG). We continually evaluate what we need to do to maintain and improve our services to customers and undertake research to understand the future impact of things like climate change and population growth on our network. Price reviews In a monopoly sector like the water industry it s our economic regulator, Ofwat, which provides an alternative for competition and sets limits on the prices we can charge. Every five years we develop our plans and bills for the next fiveyear regulatory period, based on our extensive planning and customer research, and agree this with Ofwat. This is a very rigorous process, known as a price review. At our most recent price review, completed in early 2015, we were the only company deemed by Ofwat to be more efficient than the official benchmark for both water and wastewater services. Rewards and penalties We work closely with our customers to set performance commitments for each regulatory period, designed to deliver what is most important to our customers in the most cost effective way. For some of these commitments we are able to earn financial rewards if we perform above expectations, but we could also incur penalties for underperformance. Total rewards and penalties will be assessed at the next price review in 2019, and will affect bills in future regulatory periods. Thames Tideway Tunnel To minimise the costs for our customers, we ran a comprehensive and competitive process to identify the best company to build the Thames Tideway Tunnel. In August 2015, Bazalgette Tunnel Limited secured a licence from Ofwat as a separate regulated utilities business, to deliver the landmark construction project, which will transform London and its rivers. As a result of this robust process, the impact on customers wastewater bills will be significantly lower than was originally anticipated an increase of up to 25 a year on average. About 13 of that is already included in the 2016/17 bill. A portion of the 13 is collected on behalf of Bazalgette Tunnel Limited for the construction works. This will show in our financial statements, as additional revenue, but none of this cash is retained or used by Thames. Average combined household bill Bills versus investment per customer * South West Wessex 438 Dwr Cymru United Utilities 411 Southern Anglian and sewerage companies Average combined bill 73 Source: UK statement of charges for 2016/17; industry data share 2015/16. * Defined as net wholesale capex per service provided to customers Northumbrian Combined bills are made up of a fixed charge, covering customer service expenses, as well as separate water and wastewater charges Thames 366 Yorkshire Average investment per customer* Seven Trent 8 9

6 Bridging the gap. For every 1 we collect from bills, we need an additional 35 pence (2015/16) to help fund our spending (page 4). To bridge this gap and avoid significant increases to bills during the years we need to make improvements, we borrow money at attractive rates. By spreading the cost of our investment and managing our debt over a number of years we also ensure the generations that will benefit from the improvements are those who will be helping to pay for it this makes our bills fairer and more sustainable. Bills 2,040 million Additional external loans 712 million 2,752 million Net investment 1,217 million Day-to-day operations 940 million Net financing costs, repayment of loans and dividends 595 million 10 11

7 Our borrowings explained. Borrowings We borrow money through a combination of bank loans and corporate bonds. Our corporate bonds are typical debt instruments that feature in many UK companies. They are sold to third party investors such as pension fund managers and insurance companies. Like any other loan, we pay interest on these bonds. Most of our bonds are publicly listed on major stock exchanges such as the London Stock Exchange and Irish Stock Exchange. Our credit rating The responsible way in which we operate our finances ensures we maintain a strong credit rating, as assigned by external ratings agencies Moody s and Standard & Poor s. The ongoing assessment of Thames by these two agencies provides an independent view of our performance and future outlook. Our credit rating is classified by both agencies as being of investment grade, and several tiers above the minimum level required by Ofwat. Interest on our debt The water industry is a particularly attractive investment for pension funds and other similar financial institutions due to it being a low risk investment. This, coupled with our strong credit rating, helps reduce the rate of interest we pay, meaning this is a cost effective way of borrowing money, and helps keep costs down for customers. The average interest rate we incurred over the last year was 4.2%. This compares favourably with the rest of the sector. Managing financial risk As with any company, our normal business activities expose us to a variety of financial risks, including changes to inflation and interest rates. By borrowing money from different sources and for varying lengths of time, we are able to proactively manage and spread these risks, reducing them to an acceptable level. As a regulated water company, our bills are linked to movements in inflation, which increases or decreases the amount of money we have available to pay for the interest on our debt. For that reason we have also linked around half of our debt to inflation. Most of the remaining debt is borrowed at fixed rates of interest, sometimes for many years, which helps provide certainty and maintains stable borrowing charges relative to changes in revenue. This reduces volatility in customer bills as they are protected from adverse movements in inflation rates and other financial risks. What is our gearing? We are financed by a combination of debt from our lenders and shareholder equity retained in the company. The amount we have borrowed from lenders, minus our cash and other cash-like assets, is referred to as our net debt. Our financial gearing is calculated as the relationship between our net debt and the regulatory capital value ( RCV ), which represents the value of a company s assets as agreed with Ofwat. This relationship also known as the gearing ratio shows the extent to which our operations are funded by our debt investors, rather than by shareholders. At 31 March 2016 our net debt was 10.2 billion, meaning our gearing ratio was 81%. By maintaining this level of gearing and a credit rating stronger than that required by Ofwat under our licence we are, in the long run, able to keep our bills a lot lower than they would otherwise be. Our gearing ratio is similar to those of other major water and wastewater companies that are privately held, although it is around 20% higher than those that are listed on the London Stock Exchange. International financing company We are often asked why we have an international financing company registered in the Cayman Islands. This company exists solely to market and issue corporate bonds on the public market on behalf of Thames. All of the funds are lent to Thames. This use of a Cayman Islands incorporated company is to address UK company law governing the repayment of the debt raised by the original group of shareholders in 2006 to acquire Thames. It is a structure used by a number of other UK based companies. Everything this company does is entirely transparent to UK authorities and it is fully registered for, and subject to, tax in the UK. It also operates wholly from our UK office and provides us, our shareholders and investors with no tax advantage

8 Our tax explained. Thames is committed to paying its fair share of tax and it is subject to a range of tax obligations that typical large companies face in the UK. Last year we paid around 160 million in rates, PAYE, National Insurance and other taxes. All our profits are taxed in the UK. Investment allowances To encourage investment in the UK s infrastructure, beneficial to the country s economic growth, the Government runs a capital allowances scheme. This scheme, which has existed for over 100 years in the UK and is a feature of most modern tax systems, allows us to delay our corporation tax payments while we invest so heavily in our essential infrastructure. Our net delayed tax liability, as shown on our financial statements, is currently 982 million (end of March 2016) and this will become payable when our level of investment is lower. Because of the capital allowances scheme our current average bill is 12 lower than it would otherwise have been. 14 The Government s capital allowances scheme saves our customers 12 a year off an average combined bill. 15

9 Profits and dividends. Profits Our profit is the revenue we have left after taking into account all of our operational costs and taxes. In 2015/16 our profit after tax was 566 million and most of this was retained within the company to support our investment programme. Dividends Our average dividend yield, the measure of a shareholder s return on their investment, since the start of the previous regulatory period (AMP5) is approximately 4.0%. This is calculated as the ratio between total dividend payments from Thames and a market-derived valuation of the business. These dividends are used for two purposes: 1 To pay for holding company obligations Thames is one company within a larger group of companies, known as the Kemble Group. Each of the companies within our group serves its own function. Thames s dividends are initially paid to its immediate parent company (commonly referred to as a holding company ), Thames Utilities Holdings Limited, for distribution. These dividends flow through the group, in part, to enable the group companies to pay for their own debt obligations. Much of the holding company debt was originally incurred to help fund the original acquisition of Thames by the shareholders in As the money used to pay for the interest on group debt comes directly out of the dividend paid by Thames, the cost of this debt is carried by the external shareholders, not customers. Any remaining dividends are paid to external shareholders, as further explained below. In 2015/ million was paid to holding companies and other group companies to service their debt and pay for day-to-day cash needs. 2 Shareholder returns The level of dividend we choose to pay is determined by our operational and financial performance, and is not guaranteed. We make sure they are set at a level which enables us to continue to meet our obligations, maintain low bills for customers and keep investment at a high level. When we perform well any dividend we pay to our external shareholders, via our holding companies, is seen as a return on the money they invested into our business. Zero dividends were paid to external shareholders relating to 2015/16 while we managed the risks associated with selecting the independant company to construct the Thames Tideway Tunnel. In the previous year 100 million of dividends were used to pay external shareholders. The organisation chart opposite shows the relationship between the dividends paid by Thames in 2015/16 and how they are utilised by the wider group. Since our acquisition by the current owners (in 2006) we have reinvested 39% ( 1.2 billion) of our profits back into the business. How dividends work. Relationship between the dividends paid by Thames and how they are used by the wider group (relating to 2015/16) million interest payment External shareholders Nil Our holding companies* 82.4 million dividend Thames Utilites Limited 55.0 million interest Lenders to holding companies 16 17

10 Our investment history. Average yearly investment in 2015/16 prices. Five years prior to privatisation million million The water and waste industry was privatised in 1989 Post-privatisation rebuilding infrastructure as Thames Plc (floated on the London Stock Exchange) One of the key reasons the industry was privatised was to correct the many years of underinvestment in water and waste infrastructure during public ownership. During this period, we constructed the Thames ring main, and upgraded all of our major treatment works in London. Under current ownership we ve been investing, on average per year, triple the amount we did per year for the five years before privatisation million* International expansion as part of RWE After the German utility company, RWE, acquired Thames, we accelerated the rate of our international expansion. As part of this, we purchased the US largest privately owned water company, American Works billion * Investment in UK business. Focusing on the UK as part of the Kemble Group After the Kemble Group, made up of national and international investors, bought Thames in 2006, all of our global interests were sold or closed. This allowed us to focus our attention on the UK and our operational performance has improved significantly as a result. Award-winning photograph of the Lee Tunnel by Matthew Joseph 19

11 Get in touch. By post Our finances explained Thames Clearwater Court Vastern Road Reading Berkshire RG1 8DB This leaflet can be supplied in large print, braille, or audio format upon request /16