Long-term sustainable financing

Sustainable financing is crucial as we invest to ensure the future provision of our essential water and wastewater services, while keeping bills affordable and protecting the environment around us. Our average annual combined household bill for 2019/20 is £398, which is the third lowest in England and Wales. Our 15 million customers rely on us to spend their money wisely – something we take seriously – and with some of the UK’s poorest areas in our region, we recognise the need to provide extra support for customers who are in financially vulnerable circumstances. We take a longer-term view of managing the financeability of our business ensuring we remain attractive to investors of both equity and debt. To help understand how the business is financed, take a look at ‘Our finances explained’ which explains our finances in a simple way as part of our commitment to increase transparency.

Over the last 15 years we’ve invested over £15 billion in our assets, including £1.2 billion in 2018/19, which is three times the annual investment compared to the five years before privatisation in 1989. To ensure our investment programme is affordable for customers, we borrow money to bridge the gap between bills and spend. For every £1 from customers we need an extra 17p to fund our spending (2018/19). 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.

To support our strategic priorities and our approach to sustainability, the past 12 months have seen our continued efforts to put the Environment, Social and Governance (ESG) agenda at the heart of our financial decision making. We publish ESG data and information in other documents, however, to improve the accessibility and transparency of this information, we draw it together in a separate ESG Statement. This year’s ESG statement, our second, contains four years of data. It includes references to the sources for a range of key performance measures, to give balance and context for our latest performance information.

Following our inaugural green bond, in November 2018 we signed an innovative £1.4 billion 5-year Revolving Credit Facility (RCF), which links our interest rate to annual performance against ESG metrics. We increased the size of this facility in January 2019 to a total of £1.65 billion. For a progress update on our Green Bond Framework, click on the documents below:

The agreement saw us become the first UK corporate to tie the interest rate we pay on the RCF to our Infrastructure Global Real Estate Sustainability Benchmark (GRESB) score. Outperformance on the ESG benchmark will result in a lower interest rate, with any financial gains donated to our charitable fund.

Resilience and diversity in our funding portfolio are important drivers in ensuring our financial stability over the long term. We are financed by a combination of debt from our lenders and shareholder equity retained in the company. We borrow through external public and private debt capital markets and through financial institutions across a diverse range of currencies, geographies and sources.

Our gearing (the amount of net debt relative to the regulatory capital value (RCV)) at 31 March 2019 was 82.2% (2018: 81.3%) before considering the de-gearing impact of a cash injection of £250 million in April 2019, equivalent to 1.8% of our 31 March 2019 RCV.

We retain credit ratings that allow us to access efficiently priced debt to fund our investment programme, whilst keeping bills affordable for our customers. At 31 March 2019, Class A debt was rated A3/BBB+ by Moody’s and S&P respectively (both on negative outlook), and Class B debt was rated Baa3/BBB- (both on negative outlook).

Our executive remuneration policy aligns reward with the delivery of our critical customer and environmental commitments and is mirrored in remuneration across the business. Thames Water’s principles on remuneration for Executive and Non-Executive Directors are designed to attract, retain and motivate our leaders and senior management and ensure they are focused on delivering business priorities within a framework designed to promote the long-term success of the Company.

The Remuneration Committee monitors the remuneration arrangements to ensure there is an appropriate balance between risk and reward and that the long-term performance of the business is not compromised by the pursuit of short-term value. There is a strong direct link between incentives and the Company’s strategic priorities which are focused on delivering excellent performance for customers and other stakeholders. Where performance targets are met senior management will be rewarded through the annual bonus and a long-term incentive. This means that approximately two thirds of an Executive’s total remuneration is at risk if targets are not delivered.

Remuneration for other employees is determined by level and is broadly aligned to the Executive Directors’, resulting in all employees working towards achieving outstanding outcomes for our customers and stakeholders. Although employees are not consulted directly on the Executive Directors’ remuneration policy, employee engagement surveys are carried out annually which include metrics and encourage feedback on pay and benefits. In addition, regular discussions take place with trade union and employee representatives on the pay and benefits not only for employees covered by collective bargaining but on the wider employee population.

We announced last year that there would be no dividends paid to external shareholders for the three years to 2020 – a key decision that was supported by our external shareholders in order to focus on investment to drive improvements.

During 2018/19, we paid dividends of £60 million (2018: £55 million) to our immediate parent company, Thames Water Utilities Holdings Limited (TWUHL). The dividends paid in 2018/19 were utilised solely to service the debt obligations and working capital requirements of other companies in the Group.

In 2018/19, we paid over £211 million in business rates, national insurance contributions, PAYE and other taxes. We incurred £147 million directly, mainly through business rates, and collected £64 million on behalf of our employees. As in prior years, we have not paid any corporation tax to HMRC primarily because of interest costs and tax relief for our capital investment programme.

The 2018/19 corporation tax charge of £8.9 million consists of a deferred tax charge of £4.6 million and a current tax charge of £4.3 million. The latter charge arises because Thames Water Utilities Limited pays for tax losses from other Group companies which should ultimately benefit customers through lower tax funding in future regulatory settlements. The overall tax charge is lower than the prior year due to the decrease in accounting profits.