Ofwat has asked Thames Water to explain how a £37.5m dividend it paid to a parent company does not break rules designed to protect customers and the environment.
The water regulator said it was investigating whether the dividend, which was announced on Tuesday, was in line with the company’s licence requirements. It has not yet opened a formal enforcement case.
Ofwat was told in advance about the dividend, and said it had written to the water supplier last Friday, asking for a reply by the end of the month.
Thames Water said the money was simply being moved to a parent company in order to help pay its debts, and that no dividends were handed to “external shareholders”.
The letter’s existence was first reported by The Guardian.
The regulator said: “Following notification that Thames Water has paid a dividend to shareholders, Ofwat is investigating whether this payment meets its licence requirements.
“Ofwat has requested Thames Water provide more information to demonstrate how, specifically, the dividend payment meets the licence requirement to take account of service delivery for customers and the environment, as well as investment needs and financial resilience.
“We will review any additional information the company provides and decide whether there is a case for further action.”
New rules were introduced in May this year to ensure that water companies do not pay dividends unless they have delivered for customers and the environment.
The regulator is able to impose penalties of up to 10 per cent of Thames Water’s relevant turnover.
The company said it was working with Ofwat “to provide further context and clarification” about the decision to pay the dividend.
“No distributions have been made to external shareholders of the group and they have not taken an external dividend for six years (since 2017) to prioritise investment in improving service for customers and to protect the environment,” it said.
“Our plans assume no external dividends to shareholders until at least 2030, to support our turnaround.”
It comes as MPs said they planned to bring Thames Water into parliament to answer questions.
The Environment, Food and Rural Affairs Committee said it wanted the company to come in next Tuesday to explain its finances. Ofwat has also been invited.
Earlier on Tuesday, Thames Water warned that its turnaround will “take time” and said that its debt had continued to grow in the first half of the financial year.
The UK’s biggest water supplier reported a 54 per cent drop in pre-tax profits to £246.4m in the six months to 30 September.
Revenues rose 12 per cent to £1.3bn but it spent a record £1bn on improving its network.
The results also revealed its debt pile swelled by 7 per cent to £14.7bn.
Interim bosses said “immediate and radical action” is needed to improve its environmental and financial performance.
They added: “Turning around the Thames will take time. We simply cannot do everything that our customers and stakeholders wish to see at a pace and for a price that everyone would like.
“We will continue to make the tough choices required to deliver what matters most to our customers and the environment.”
The results come just days after it emerged that auditors of Thames Water’s parent company Kemble Water Holdings have warned it could run out of money by next April if shareholders do not pump in more cash.
PricewaterhouseCoopers (PwC) warned in accounts published last week at Companies House that there is a “material uncertainty” over the future of Kemble – the main company behind Thames Water – amid worries there are no plans in place to refinance a £190m loan at one of its subsidiary companies.
Thames Water shareholders agreed in the summer to inject £750m of new funding to bolster the supplier’s finances and stave off the threat of nationalisation.
Last year the company had asked investors for £1bn.
A Thames Water Utilities spokesperson said: “We are in a robust financial position and are extremely fortunate to have such supportive shareholders.”
The firm said the funding package agreed in the summer “is subject to satisfaction of certain conditions, including the preparation of a business plan that underpins a more focused turnaround that delivers targeted performance improvements for customers, the environment and other stakeholders over the next three years”.
Shareholders have also “acknowledged” the need for around another £2.5bn in equity investment needed in future regulatory periods, the group added.
The water supplier’s former boss, Sarah Bentley, stepped down abruptly in June amid concerns over the firm’s financial security.
It was revealed in June that the government was drawing up contingency plans for an emergency nationalisation should Thames Water collapse as concerns grew that it would buckle under the weight of its massive debts.
The company – whose ownership structure has been revealed to comprise a complicated web of firms behind the supplier – has been saddled with debts since privatisation and now faces higher interest on this debt as some of it is linked to the rate of inflation.
The group is also set for a possible investigation into whether it misled MPs earlier this year over the state of its finances and support from investors.
