Finance

We operate in a sector where the level of bills we charge our customers is strictly controlled by a financial regulator and where efficiency and wise investment of funds is therefore crucial.

At the same time, we are entering into our biggest-ever five-year capital investment programme, in which profits are important in continuing to help fund the major improvements we are making to our infrastructure.

Key financial data

Over the last three years, we have achieved a step change in both operational performance and efficiency, meeting and beating the targets agreed with our regulators. This has been achieved by a 'back to basics' approach and by setting clear corporate objectives.

We reported our best-ever performance in 2008/09 across many areas of the business. We have beaten this performance in 2009/10 while delivering the largest investment programme in the industry and improving profit before tax by 4.3% to £453.6m.

Operating expenditure remained broadly in line with the prior year. This was mainly a result of our continued emphasis on operating efficiencies, while ensuring we delivered the improvements agreed with our regulators. In 2008/09, we had increased the level of funds set aside to cope with bad debts resulting from the economic downturn. No additional funds were deemed necessary for this in 2009/10.

We spent £782.5m on capital expenditure in 2009/10, following two years of annual expenditure of nearly £1bn, which illustrates our significant level of investment in infrastructure. Despite this large programme, we have efficiently delivered on the investment plans agreed with our economic regulator, Ofwat.

We are already well advanced in planning our programme of work for 2010 – 2015, with a cutting-edge capital delivery strategy firmly in place to ensure that we achieve all regulatory outputs, as efficiently as possible.

With a clear focus, tight contracts and streamlined delivery process, Thames Water enters the new five-year investment period with the capability to become the benchmark company for capital delivery in the water industry.

Dividends

Dividends to shareholders are the return that they receive for investing in the business.

Thames Water paid dividends to shareholders totalling £191.0m during 2009/10.

Key financial data (£m)

	2005/06	2006/07	2007/08	2008/09	2009/10
Turnover	1,393.0	1,431.0	1,487.6	1,558.2	1,623.8
Operating expenditure*	620.0	784.8	722.9	728.5	723.2
Profit before tax	346.5	270.1	419.2	435.1	453.6
Capital investment	554.2	779.4	997.1	982.4	782.5

* Excluding historic cost depreciation

Profit – why we need it

We need to maintain a strong level of profitability in order to fund our extensive capital programme. The diagram below illustrates our financial obligations in 2009/10, which are all met from our charges to customers, allowing us to:

• sustain our operational activities
• fund our capital programme
• pay interest on our debt
• pay our taxes, and
• return a dividend to our shareholders.

Our expenditure and return on capital is regulated by Ofwat as part of the Price Review process every five years.

It is only by sustaining this level of profitability that we can continue to deliver the investment and service to customers that we are committed to and to drive forward further efficiency.

Where the money goes - 2009/10 (£m) [1]

Income	£1,624m
Operating costs	£723m
Finance costs	£108m
Tax	£76m
Capital cost	£783m
Dividend costs	£191m
Movement in working capital	£64m
Borrowings	£193m

• ¹ Total borrowings for 2009/10 were £455m, of which £214m repaid maturing debt while the £193m shown above was used to help fund the business. The remaining £48m was added to the cash held by the company. We borrow in advance to ensure we have the funding in place to pay ongoing costs and fund our large investment programme.