Thames Water Utilities Limited Investor Report 30 September 2016 1
Important Notice This report is being distributed in fulfilment of a document, the Common Terms Agreement (the CTA ), which governs the Company s obligations to its bondholders and other financial creditors. It is directed to, and intended for, existing investors in the Company. No other persons should act or rely on it. The Company makes no representation as to the accuracy of forecast information (or any other information in this report, other than set out in the CTA). These forecasts involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forecasts. This report should not be relied on as a guide to future performance, and should not be relied on in deciding whether to undertake future investment in the Company. It should be noted that the Company s auditors have not reviewed the information in this report. For the purposes of the financial promotions regime under the Financial Services and Markets Act 2000, this report is given on the basis of the exemption provided in article 69 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as it relates to bonds which are already admitted to trading on a relevant market). This report should be read in conjunction with, and as a supplement to, the Thames Water Utilities Limited financial statements for the period ended 30 September 2016. Please refer to the Thames Water website www.thameswater.co.uk for this document in full. 2
Contents 1 Highlights for period ended 30 September 2016 2 Thames Tideway Tunnel 3 Business Update 4 Financing 5 Dividend policy 6 Outsourcing 7 Financial ratios 1. Highlights for the period ended 30 September 2016 3
The next chapter for Thames Water Chief Executive Officer Steve Robertson joined in September 2016. New Chief Financial Officer Brandon Rennet appointed and will join in March 2017. Transfer of retail non-household business to Castle Water, for circa 99 million, announced in July 2016 and on-track to complete at business retail market opening in April 2017. Transformation and Technology Alliance launched in October 2016 to sit alongside existing eight₂o and Infrastructure Alliance. Maintaining robust finances 540.9 million investment as part of huge c. 4 billion AMP6 (2015-20) investment programme to benefit customers, the environment and future generations. A3 (Moody's) and A- (S&P) Class A credit ratings reaffirmed. Maintained third lowest combined water and wastewater bill in England and Wales. 127.3 million underlying profit before tax (for the six months ended 30 September 2015: 216.8 million), excluding impact of net losses/gains on financial instruments. Customers at the heart of all we do 50% reduction in second stage complaints. Resolved 95% of complaints first time. 450,000 customers now using online account management system. Reducing environmental impact and protecting water resources for future generations 90,000 smart meters, which use state-of-the-art wireless technology, installed by 30 September 2016 to put customers in charge of their bills and help protect water resources. 127 GWh of energy generated from sewage after investment in technology a 26% increase on the first six months of 2015/16 and saving 15 million off the energy bill. Striving for zero safety incidents Achieved two million man hours without an injury leading to lost working time for the first time. 4
2. Thames Tideway Tunnel In the first six months of this financial year TWUL billed revenue for the construction of the Thames Tideway Tunnel ( TTT ) for the first time. 15.2 million was recognised in the period, which is, when collected, passed on to Bazalgette Tunnel Limited ( BTL ). As a result of the arrangements in place for the delivery of TTT and related accounting treatment, our revenue will increase but there will be no associated costs reflected in our income statement while the TTT is built. This will increase our profits during the construction phase but the profits will not be supported by cash, therefore the Directors have excluded the monies from our underlying results. The cash collected and paid over to BTL during construction represents a prepayment for the use of the TTT once the project is complete. TWUL is reporting conformed financial ratios (see Section 7) to reflect this pass through in revenue. The Lee Tunnel, our first super-sewer at 7 kilometres long and 7 metres in diameter, is currently in operation (taking sewage from Abbey Mills to Beckton STW for treatment) and, once the TTT is in operation, will also serve to transport the TTT flows to Beckton STW. In West London, we are continuing to progress our planning application for the Counters Creek project, which is needed to protect thousands of homes from flooding after heavy rainfall and work continues to develop tactical and strategic options for delivery of the project. 3. Business Update Period to 30 September 2016* *This should be read in conjunction with the TWUL interim report and financial statements for the period ended 30 September 2016, which were published on 24 th November 2016. Our new Chief Executive Officer, Steve Robertson joined us in September and is already making a positive impact on our business. Joining us from Truphone, Steve has a wealth of experience in essential infrastructure and high technology businesses. We also announced the appointment of Brandon Rennet as our new Chief Financial Officer, to replace Stuart Siddall when he retires at the end of December. Brandon has worked in the power industry for 14 years and joins us from SSE. In July 2016, we announced the sale of our retail non-household business to Castle Water, for 99 million. Castle Water will begin to take on our non-household retail activities in autumn 2016 and will acquire our full business retail operation when the market opens in April 2017. With less than six months to go, we re working hard with Castle Water to ensure a seamless transition for our customers. 5
Post 30 September 2016 Q3 SIM The Q3 SIM scores were reported by Ofwat on 16 December 2016. Thames Water s overall score was 4.16 (Q2 4.15). The industry average increased from 4.34 to 4.37. Overall Thames was 18th out of 18. For the year to date this puts Thames 18th out of 18. The gap between top and bottom for the industry has narrowed and was 0.36 for Q3. The revenue score increased to 4.31 from 4.23 whilst the industry average dropped to 4.45 (Q2 4.50), putting Thames 15th out of 18 on revenue. The water score fell to 3.73 (Q2 3.97) with the industry score improving to 4.23 (Q2 4.17), putting Water 18th out of 18. The waste score was 4.29 (Q2 4.16) with the industry score improving to 4.41 (Q2 4.25) putting Waste 8th out of 10 in the industry. Refinancing of PCR bond In December 2016 we completed the refinancing of the 400m Class A 2058 PCR bond. The bond had a final maturity date of 9 April 2058 with a fixed nominal coupon of 7.241% set until 9 April 2018, at which point the bond would be subject to a reset mechanism. In order to increase the flexibility of the timing of the April 2018 interest rate reset procedure, in late 2016 we concluded a consent solicitation process to amend the terms of the PCR bond so as to grant to Morgan Stanley an early call option giving the bank the right to acquire, prior to 9 April 2018, all of the PCR bonds at a make-whole purchase price. Following the successful completion of the consent solicitation process, in December 2016 we completed the refinancing with the issue of a new 400m 2058 security that was exchanged for the original PCR bond. The new 400m bond was priced at a coupon of 7.738%. In addition 114.9mm of inflation overlay was executed, converting an element of the interest basis to RPI-linked with a coupon of 2.75%. 4. Financing TWUL raises debt either directly or through its wholly owned financing subsidiary, Thames Water Utilities Cayman Finance Limited (TWUCF). TWUL also has bonds outstanding via its wholly owned subsidiary Thames Water Utilities Finance Limited (TWUF). Table 1 Current Credit Ratings Company Moody s Standard & Poor s TWUL Corporate Family Rating TWUCF Class A Issuer Rating TWUCF Class B Issuer Rating Baa1 (stable) A3 (stable) Baa3 (stable) N/A A- (negative) BBB (negative) In October 2016 Moody s affirmed the Baa1 Corporate Family Rating (CFR) of the Company and the A3 senior secured Class A rating and Baa3 subordinated debt Class B rating with stable outlook. In September 2016 Standard & Poor s (S&P) affirmed the A- (Class A) and BBB (Class B) ratings in relation to bonds issued by the securitisation group and maintained a negative outlook. The outlook remained negative reflecting S&P s assessment of the very limited headroom at current leverage levels. S&P plan to review the ratings during the first half of 2017. 6
i) Recent financing activity During the period ended 30 September 2016 the following was undertaken: May 2016-39m Class B fixed rate loan maturing 2026 ii) Bonds outstanding at 30 September 2016 Table 2 Class A and B bonds outstanding at 30 September 2016 Issuer Currency Face Value (currency m) Coupon % Maturity Date Class Description Book Value incl. accretion at 30 Sept 16 ( m) TWUCF EUR 500.0 3.250% 09/11/2016 A Fixed Rate Bond 432.6 TWUCF GBP 550.0 5.375% 21/07/2017* B Fixed Rate Bond 550.0 TWUF GBP 200.0 5.050% 30/06/2020 A Fixed Rate Bond 200.0 TWUF GBP 225.0 6.590% 20/04/2021 A Fixed Rate Bond 225.0 TWUF GBP 175.0 3.375% 21/07/2021 A RPI Linked Bond 259.7 TWUCF EUR 113.0 2.300% 18/07/2022 A CPI Linked Bond 101.6 TWUCF GBP 300.0 5.750% 13/09/2030 B Fixed Rate Bond 300.0 TWUCF GBP 500.0 4.000% 19/06/2025 A Fixed Rate Bond 500.0 TWUCF GBP 45.0 0.721% 21/12/2027 A RPI Linked Bond 45.7 TWUCF GBP 300.0 3.5% 25/02/2028 A Fixed Rate Bond 300.0 TWUF GBP 330.0 6.750% 16/11/2028 A Fixed Rate Bond 330.0 TWUF GBP 200.0 6.500% 09/02/2032 A Fixed Rate Bond 200.0 TWUCF GBP 300.0 4.375% 03/07/2034 A Fixed Rate Bond 300.0 TWUCF GBP 40.0 0.75% 18/12/2034 A RPI Linked Bond 40.6 TWUF GBP 600.0 5.125% 28/09/2037 A Fixed Rate Bond 600.0 TWUCF JPY 20,000.0 3.280% 20/08/2038 A Fixed Rate Bond 152.0 TWUCF GBP 50.0 3.853% 15/12/2040 A LPI Linked Bond 60.4 TWUCF GBP 500.0 5.500% 11/02/2041 A Fixed Rate Bond 500.0 TWUCF GBP 50.0 1.980% 28/08/2042 A RPI Linked Bond 63.5 TWUCF GBP 55.0 2.091% 06/10/2042 A RPI Linked Bond 67.8 TWUCF GBP 40.0 1.974% 12/10/2045 A RPI Linked Bond 45.9 TWUCF GBP 300.0 4.625% 04/06/2046 A Fixed Rate Bond 300.0 TWUCF GBP 100.0 1.846% 28/08/2047 A RPI Linked Bond 127.0 TWUCF GBP 200.0 1.819% 28/08/2049 A RPI Linked Bond 253.9 TWUF GBP 300.0 1.680% 11/07/2053 A RPI Linked Bond 401.0 TWUF GBP 300.0 1.681% 11/07/2055 A RPI Linked Bond 401.0 TWUCF GBP 200.0 1.771% 28/08/2057 A RPI Linked Bond 253.9 TWUCF GBP 400.0 7.241% 09/04/2058** A Fixed Rate Bond 400.0 TWUCF GBP 350.0 1.760% 28/08/2062 A RPI Linked Bond 444.4 Total 7,856.2 * Coupon step up and call date ** 400m Class A bond issued with a final maturity date of 9 April 2058 with a fixed coupon of 7.241% until 9 April 2018. See section 3 above regarding early remarketing of this bond. 7
iii) TWUL Net debt reconciliation The book value of RPI Linked Bonds as at 30 September 2016 includes accretion of 563.6m. Table 3 TWUL net debt reconciliation m Book Value Bonds including accretion Class A 7,006.2 Book Value Bonds including accretion Class B 850.0 Total Book Value Bonds including accretion 7,856.2 Class A USPP Notes 462.5 Class B USPP Notes 115.6 Class A RPI linked loans including accretion of 125.1m 1,455.1 Accretion on RPI Linked Swaps 205.9 Class A Floating Rate Loans 650.0 Class A Cross-currency swaps (66.8) Class B Cross-currency swaps (19.0) Class B Loans 179.0 Less TWUL Cash Investments (735.2) TWUL Net Debt as per Compliance Certificate 10,103.2 Fees and Discounts (66.7) Intercompany Loans* 300.0 Derivative financial liabilities (189.3) Interest payable on amounts owed to group undertakings 149.3 Interest payable on secured bank loans 4.7 TWUL Net Debt as per accounts at 30 September 2016 10,301.2 * This relates to intercompany loans to financing subsidiaries for which there is no related external debt. 8
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 2051 2052 2053 2054 2055 2056 2057 2058 2059 2060 2061 2062 2063 2064 2065 m 16-17 17-18 18-19 19-20 20-21 21-22 22-23 23-24 24-25 25-26 26-27 27-28 28-29 29-30 30-31 31-32 32-33 33-34 34-35 35-36 36-37 37-38 38-39 39-40 40-41 41-42 42-43 43-44 44-45 45-46 46-47 47-48 48-49 49-50 50-51 51-52 52-53 53-54 54-55 55-56 56-57 57-58 58-59 59-60 60-61 61-62 62-63 63-64 64-65 65-66 66-67 m iv) Maturity profile and headroom analysis Graph 1 Debt maturity profile 900.0 800.0 700.0 600.0 500.0 400.0 300.0 200.0 100.0 0.0 Class B Class A Growth in RCV ensures significant headroom available across all maturities. There is a covenant in place which dictates that additional debt issuance shall not cause net debt to exceed 20% of RCV in any 24 month period or 40% of RCV within any AMP. Graph 2 Covenant headroom analysis Financial Year 2,000.0 1,500.0 1,000.0 500.0-9
v) Derivative transactions All hedging agreements are entered into under the terms of the Hedging Policy and the CTA. TWUL, TWUF and TWUCF have entered in to a series of ISDA documents with various counterparties. Table 4 Group & TWUL Derivative summary valuations Group MtM as at 30 TWUL MtM as at 30 Derivative type September 2016 ( m) September 2016 ( m) Cross currency swaps (6.8) (71.1) Interest rate swaps (315.4) (315.4) RPI linked swaps (981.2) (470.6) Total (1,303.4) (857.1) Foreign currency debt instruments are converted to Sterling liabilities with cross currency swaps as illustrated below. Swaps with breaks amount to 1.19% at 30 September 2016 (limit 5% of RCV). Table 5 Cross currency swaps Issuer Foreign Currency Currency Amount (m) m Maturity Date Notes MtM as at 30 September 2016 ( m) TWUCF EUR 500 438.1 09/11/2016 1.2 TWUCF USD 150 96.6 27/02/2019 Class B 17.1 TWUCF USD 150 96.6 28/02/2022 14.3 TWUCF EUR 113 100.0 18/07/2022 (1.9) TWUCF USD 200 128.8 27/02/2024 16.9 TWUCF USD 250 161.0 01/03/2027 16.7 TWUL JPY 20,000 153.6 20/08/2038 (71.1) Total 1,174.7 (6.8) In mid-2014 TWUL entered into 2.25bn of forward starting fixed rate interest rate swaps to protect interest costs for AMP6. Due to the fall in short term interest rates the mark to market has increased from 31 st March 2016 ( 221.6m). Table 6 Interest rate swaps Issuer Notional m Start Date Maturity Date MtM as at 30 September 2016 ( m) TWUL 15.0 31/03/1998 30/03/2018 (1.7) TWUL 500.0 13/09/2016 13/09/2021 (57.8) TWUL 500.0 16/07/2017 18/07/2022 (65.6) TWUL 300.0 14/03/2019 14/03/2024 (35.2) TWUL 400.0 16/03/2017 16/03/2024 (71.5) TWUL 250.0 14/09/2019 14/09/2024 (29.3) TWUL 300.0 16/03/2018 16/03/2025 (54.1) 2,265.0 (315.4) 10
Table 7 Inflation swaps The following RPI linked swaps have been entered into to convert the coupon on various bonds. Issuer Notional m Base RPI Table 7 RPI-linked swaps Next Accretion Payment Date Maturity Date Further Payments Profile MtM as at 30 September 2016 ( m) TWUL 200.0 210.9 At maturity 09/02/2032 - (80.5) TWUL 150.0 206.1 At maturity 28/09/2037 - (113.7) TWUL 250.0 206.1 28/09/2023 28/09/2037 12 years, maturity (149.3) TWUL 200.0 206.1 28/09/2017 28/09/2037 Every 5 years (94.3) TWUL 94.1 215.1 20/08/2018 20/08/2038 Every 5 years (29.9) TWUL 10.0 258.8 At maturity 31/03/2026 - (1.5) TWUL 10.0 258.8 At maturity 31/03/2026 - (1.5) TWUF 100.0 215.3 30/06/2020 31/12/2029 Every 5 years (63.7) TWUF 200.0 215.3 31/12/2019 31/12/2039 Every 5 years (210.8) TWUCF 100.0 218.0 17/02/2020 17/02/2060 Every 5 years (203.4) TWUCF 100.0 235.2 At maturity 11/07/2022 - (32.7) 1,414.1 (981.2) None of these swaps contain breaks. Accretion as a percentage of Class A net indebtedness is 2.29% (limit 8% of Class A net indebtedness). vi) Available facilities As at 30 September 2016, TWUL had undrawn committed facilities of 1,450m in place. These facilities provide the necessary liquidity to fund the operations of the business for a minimum of twelve months. The undrawn committed facilities consist of the following: 950m revolving credit facility expiring November 2021. In September the extension of the maturity of the RCF was completed. The facility will now expire in 2021. This 5+1+1 facility had an initial maturity of 2020 with the ability to extend by a further year with lenders consent at the anniversary of signing in each of the first two years. Pricing remained unchanged. 500m 364-day liquidity facilities (split: 370m debt service reserve and 130m operations and capital maintenance reserve). vii) Counterparty rating requirements There are minimum credit ratings requirement for TWUL bank counterparties. Minimum short term ratings from S&P of A-1 and from Moody s of P-1 are required for: Money market deposit banks, Account Bank, Standstill Cash Manager and Liquidity Facility Provider. Counterparties losing the minimum rating requirement should be replaced. Hedge Counterparties are required additionally to hold a minimum long term rating from Moody s of A3. Hedge Counterparties losing the minimum rating requirement must post collateral to TWUL or replace themselves as counterparty. NatWest currently remains as Account Bank and Standstill Cash Manager despite falling below the Minimum rating requirement. In November 2015 TWUL published an OJEU notice for a transmission banking services contract, including the Account Bank and Standstill Cash Manager roles. In late 11
2016 HSBC was awarded preferred bidder status. We anticipate that the contract will be awarded early in 2017. viii) Accretion charge The income statement charge for the 6 months to 30 September 2016 relating to accreted interest expense and the total cumulative accretion held on the balance sheet on RPI linked debt and derivative instruments is detailed below. Table 8 Accretion charge Instrument 6 months to Sept 2016 ( m) Accretion paydowns 6 months to Sept 2016 ( m) Total cumulative accretion ( m) Index-linked Bonds 17.2 563.6 Index-linked Loans 22.0 125.1 Index-linked Swaps 11.8 169.5 Index-linked Swaps with 5 year accretion paydowns 11.1 36.3 Total 62.1 894.5 ix) Cash and Authorised Investments As at 30 September 2016, TWUL held the following cash and cash equivalent investments. All bank deposits are held with counterparties that hold a short-term rating of A1/P-1 or higher. Table 9 Cash and Authorised Investments Counterparty type Amount ( m) Cash and Cash Equivalents (AAA Money Market Funds) 389.6 Short Term Investments (Bank Deposits) 345.6 Total TWUL cash and investments 735.2 4. Dividends During the period the Company has paid dividends of 30.0 million (2015/16: 82.4 million). All dividends paid in respect of the current year were made to other companies within the Kemble Water Group, to service their own debt obligations and working capital requirements. External shareholders have not received any dividends in the period to 30 September 2016. 5. Outsourcing TWUL continues to monitor and comply with the Outsourcing Policy as detailed under the Common Terms Agreement. This includes acting as a reasonably prudent water and sewerage undertaker and in accordance with Good Industry Practice. 12
6. Financial ratios The number of Test Periods and forward looking test dates varies dependent on the particular Calculation Date and certain periods may not be required for certain Calculation Dates. We have made adjustments to amounts referred in the 30 September 2016 TWUL financial statements in order to arrive at the covenants below in accordance with the terms of the Common Terms Agreement. Forward looking ratios for March 2018 to March 2020 and an information sheet on additional conformed interest cover ratio calculation have been provided to the Security Trustee and the Facility Agent as required in the CTA. This information is not however included in the published Investor Report. Secured creditors may register their interest in receiving a full version of the investor report by contacting the Security Trustee, the Facility Agent or Thames Water as appropriate. Table 10 Senior and Class A net debt breakdown of calculation for period to 30 September 16 Senior net debt Class A net debt 30 September 2016 ( m) 30 September 2016 ( m) Senior net debt per accounts 10,301.10 Senior net debt per accounts 10,301.10 Less subordinated intercompany debt (0.0) Less Class B debt (1,125.6) Less intercompany loans (300.0) Less intercompany loans (300.0) Less accrued interest (153.9) Less accrued interest (153.9) Add derivative financial liabilities 189.3 Add derivative financial liabilities Add amortised debt fees 66.7 Add amortised debt fees 66.7 Senior net debt per compliance certificate 10,103.2 Class A net debt per compliance certificate 189.3 8,977.6 Table 11 Conformed net cashflow 31 March 2017 ( m) Cashflow from operations 1,101.9 Reversal of capex creditor 48.3 Less IP cashflows (35.3) Add back IP Payments 35.3 Net cashflow 1,150.2 TWUL receives interest on its 2,015m intra-group loan to TWUH. Within the calculation of net interest paid, TWUL excludes the interest it receives on this loan. For the purpose of this calculation the tax effect of eliminating the inter-company loan interest is also excluded from the Net Cash Flow. Following a STID Proposal in April 2015, additional Adjusted Interest Cover Ratios were introduced to introduce depreciation as a replacement for CCD and IRC from the start of AMP 6. Included in Appendix 1 are the Senior PMICR (additional conformed) calculations as per the information covenant obligation referenced in the above STID Proposal. 13
Table 12 Depreciation Depreciation as used in additional conformed interest cover ratios 31 March 2017 ( m) Water and wastewater depreciation (12/13 prices) (542.4) Factor to convert from 12/13 to outturn prices 1.081 Depreciation (Outturn prices) (546.8) We confirm that in respect of the Calculation Date on 30 September 2016, by reference to the most recent financial statements in accordance with Paragraph 1 (Financial Statements) of Part 1 (Information Covenants) of Schedule 4 (Covenants) to the Common Terms Agreement that the ratios are as detailed in the table below. Please refer to Appendix 1 Financial ratio calculations for the detailed calculation of each ratio. Table 13 The ratios TWUL Test date 30 September 2016 31 March 2017 Class A RAR 71.3% 71.7% Conformed Senior RAR 80.3% 80.4% Test date 31 March 2017 Conformed Class A ICR 3.93 Additional Conformed Class A Adjusted ICR 2.06 Additional Conformed Senior Adjusted ICR 1.73 Additional Conformed Class A Average Adjusted ICR 2.00 Additional Conformed Senior Average Adjusted ICR 1.69 We confirm that each of the ratios has been calculated in respect of the relevant period(s) for which it is required to be calculated under the Common Terms Agreement and has not breached the Trigger Event Ratio Levels and has not caused Paragraph 17 (Ratios) of Part 2 (Events of Default (TWUL and the Issuer)) of Schedule 6 to be breached. 14
Yours faithfully, STUART SIDDALL -------------------------------------------------------------------- Chief Financial Officer and Director For and on behalf of THAMES WATER UTILITIES LIMITED NICK FINCHAM -------------------------------------------------------------------- Director For and on behalf of THAMES WATER UTILITIES LIMITED ANDREW BEAUMONT ------------------------------------------------------------------- Director For and on behalf of THAMES WATER UTILITIES CAYMAN FINANCE LIMITED ANDREW BEAUMONT -------------------------------------------------------------------- Director For and on behalf of THAMES WATER UTILITIES FINANCE LIMITED 15
Contact details Stephen Wheeler Deputy Group Treasurer Telephone 020 3577 5999 Mobile 07557 350839 stephen.wheeler@thameswater.co.uk Kate Randall Treasury Manager Financing, Investment & Risk Management Telephone 020 3577 7164 Mobile 0774 7640408 kate.randall@thameswater.co.uk 16