Thames rules out going offshore to swerve nationalisation

Thames Water’s chief financial officer has admitted to Utility Week that the threat of renationalisation is unsettling investors but insisted the company has no plans to re-open its controversial Cayman Islands’ subsidiaries to mitigate its impact.

Brandon Rennet also said he was “cautiously optimistic” that the company would not need to go to the Competition and Markets Authority (CMA) over Ofwat’s final determination of its business plan for the next five years.

He remained tight-lipped on the identity of the company’s next chief executive, widely rumoured to be current UK Power Networks’ (UKPN) boss, Basil Scarsella. However, he said the process to appoint a replacement for Steve Robertson was well advanced and that an announcement could be made before Christmas.

Rennet was speaking to Utility Week on the back of the publication of Thames’ half-year results, which showed total turnover up slightly to £1.1 billion, largely reflective of under-recovery of revenue last year. Underlying operating profit was £301.2 million in April to September of this year, compared to £224 million in the same period last year. Thames recorded a pre-tax loss of £54.3 million, compared to a profit of £42.4 million in H1 2018, which Rennet said was mainly due to market-to-market movement on hedging instruments used to reduce risk.

Operationally, Thames saw its biggest reduction in leakage for 20 years with an 11 per cent drop to 606 megalitres per day. Rennet said this had been achieved through investment in several areas including more sophisticated modelling and better detection protocols.

Internal sewer flooding incidents were down 13 per cent and total pollution incidents fell from 217 in the first half of last year to 212 this year. However, the number of Category 2 (significant) incidents increased from six last year to eight in 2019. Rennet said this was due to a challenging start to the year and certain extreme weather conditions but that the rate of Category 2 incidents had tailed off.

Resilience challenges

Rennet said that looking over the next five year-period, and beyond, building resilience in a network where 62 per cent of pipes are more than 60 years old was the fundamental challenge.

He said: “We have got very old pipes, in corrosive soil conditions, in inaccessible areas and under intense pressure. It’s a significant challenge and needs to be addressed over decades.

“We have started to look at this as a long-term project, which is essentially about re-plumbing London – probably in a fundamental way. It’s not about just replacing the existing network on a like-for-like basis – swapping cast iron for plastic. We’re considering extending the London Ring Main which would give us greater flexibility to shift large volumes of water across the capital to address certain weakness. We’re having constructive engagement with Ofwat on that and we want to work closely with them about what needs to be done and the delivery model.”

Immediate options Thames is investigating include water transfer from the River Severn, a new reservoir in Abingdon, Oxfordshire and water reuse in London.

Ofwat has allocated extra resources for the reservoir in its draft determinations but Rennet said there was still a way to go to come to agreement with the regulator over funding these large-scale projects.

In the company’s interim report, Rennet described Ofwat’s stance in its draft determinations as representing an “unrealistic productivity challenge”.

PR19 divisions narrowing

The company has already accepted a further reduction in its overall budget for the 2020-2025 period from £10.9 billion (which itself was a drop from the original £11.7 billion request) to £10 billion and Rennet said the two sides were now “not too far away on base costs”.

He said: “We have been doing a lot of work on efficiency and tried to explain to Ofwat what is baked into our efficiency targets.

“It comes down to what is in scope in terms of additional projects that we feel we should be progressing.

“We are extremely keen not to go to the CMA – it creates a huge amount of distraction from critical activities of pushing on with the business plan and driving improvements.

“If we end in a place where we don’t think we can deliver what we know we need to do then we wouldn’t have any option but right now I am cautiously optimistic that we won’t have to go there.”

Thames last year closed down its Cayman Islands subsidiaries but with defensive moves by other utilities players to protect investors in the case of renationalisation, would the company consider re-opening them?

“Let me be absolutely clear, we have no intention of re-opening the Cayman entities”, Rennet insisted.

Nationalisation on the radar

He added: “We have discussed the topic of potential renationalisation within the boardroom. The position we have taken is that, with regard to people protecting their interests, that is down to shareholders. We are going to concentrate on the task in hand and we’re seeking to avoid the distraction of the renationalisation agenda.

“That threat creates uncertainty and we know that investors don’t like uncertainty. That is very unhelpful when you are seeking to fund a large capital programme.

“Whatever ownership we end up under, the priority is that are able to maintain the high levels of investment we need now and into the future to fund those vital projects.”

With the polls showing a strong lead for the Conservatives in next month’s elections, it seems more likely that Brexit will be the key issue for 2020 as opposed to renationalisation. Rennet said that while he does not expect a significant impact on the firm’s direct workforce, there were certainly concerns around how its supply chain would be impacted.

He added: “The Brexit issue that is front and centre is the availability of the critical chemicals. So far, the response to that seems to have been one of the best pieces of cross-industry collaboration we have seen and we are as well prepared as we could be.”