Thames Water warns of funding gap

The UK's biggest water company today warned of a potential funding gap as the recession poses "significant challenges" for the business.

Thames Water said rising bad debts and the more expensive cost of financing "will make it more difficult to fund the essential investment in the network that is required".

The company, which supplies water to 8.5 million customers across London and the Thames Valley, had planned to invest £5.5 billion in the 2010-2015 period - funded by a 17 per cent rise in bills before inflation.

But regulator Ofwat's final decision on prices published last week limited the firm to a 3 per cent rise. Thames Water has two months to decide whether to accept the decision or appeal to the Competition Commission.

Thames' spending plans for the next five years include the construction of two tunnels which will reduce overflows from London's sewerage system to cut pollution in the Thames and the River Lee.

According to interim results, the company met its leakage targets for the third year running despite a severe winter which caused a major rise in the number of burst pipes.

Leakage levels have continued to fall during 2009 and are currently at their lowest ever, the firm added.

Thames Water's pre-tax profits jumped 15 per cent to £225.5 million for the six months to 30 September despite headwinds from bad debts and energy bills.

This was due to lower interest payments on parts of its £5.4 billion debt pile linked to the Retail Prices Index, which is currently negative. Revenues rose by almost 4 per cent to £805.6 million due to price hikes previously agreed with the regulator.

The firm was taken private in 2006 by a consortium headed by Australian investment bank Macquarie. These investors took a £131 million dividend from the business for the year to 31 March.