Thames Water investigated for financial stability and dividends

Thames Water faces new scrutiny by lawmakers and regulators regarding its financial state.

Ofwat said on Tuesday that it is investigating the £37.5mn in dividends paid by Britain’s largest water company in October. MPs want to talk to Thames Water managers about the £500mn invested by the utility’s investors in order to understand it better.
Ofwat regulates only one layer of the complex corporate structure that Britain’s biggest privatised water utility employs. Thames Water announced its half-year results Tuesday. It said that it paid a £37.5mn (£37.5mn) dividend to the regulated company, which ultimately went to its parent.

Ofwat stated: “Following notice that Thames Water paid a dividend for shareholders, Ofwat investigates whether this payment meets the licence requirements.”

An investigation is taking place after new license conditions were introduced in May. These conditions require companies to consider customer and environmental needs before giving out dividends, and to prioritize long-term financial stability.Thames Water could be fined up to 10% of its turnover if it is found in breach of the rules.

Thames Water says that no dividends have been paid and won’t be until 2030.

Thames Water provides water and sewage services to around a quarter (25%) of England’s population. The company had to pay more for its £14.7bn in debt, and also faced higher labour and energy costs. It also faces an uproar over sewage pollution.

Last week, the Financial Times reported that Thames Water gave a shareholder’s loan of £515mn to its parent company, which is not regulated. The loan charges 8% interest and was given in the form of new equity.Kemble Water then transferred £500mn from this borrowed money to the regulated utility, Thames Water.

The Environment, Food and Rural Affairs Committee said on Tuesday that it had demanded the return of Thames Water’s bosses so MPs could examine whether the company misled Parliament when it informed the committee in July it had received £500mn from shareholders.

The committee will also examine the financial viability of Thames Water in the future. Ofwat was also asked to attend, so that MPs could investigate “the rigour” of its regulatory oversight.

Thames Water said the £500mn was equity that went into the “ringfenced entities” and that “there is not obligation to repay these money”. The company says that it had total liquidity of £3.5bn by the end of September. This is down from £4bn last March.

According to Nick Hood from Opus Business Advisory Group, the £515mn given to Kemble was definitely a loan, as indicated in the accounts.He said that “the vulnerability of Thames Water, as an actual supplier of water to consumers, depends on the stability” of the entire group.

These investigations follow the first-half results released on Tuesday, which highlighted the financial and operational fragility of the company. In the six-month period ending September 30, pre-tax profits dropped 54 percent to £246mn, while revenues rose 12 percent to £1.2bn. The company acknowledged that pollution incidents and complaints from customers had risen, and it was also struggling with “frequent breakdowns in its ageing infrastructure”.

Thames Water previously announced that investors, including sovereign wealth funds and private equity firms, had agreed to inject £750mn (£750m) by 2025 under conditions of stabilising the finances and delivering infrastructure improvements.

Alastair Cchran, interim co-chief Executive and finance director, said on Tuesday that the £750mn investment was yet to be confirmed despite the fact that the business plan of the company had been submitted to the regulator Ofwat back in October.

Investors want assurances from Ofwat about the support of their business plans, he explained. They will adopt a pragmatic approach based on the feedback that they receive.

The company asked Ofwat to increase customer bills by 40% until 2030 in order to support the investment of £750mn.

Shareholders want to know about the rise in bills. They want to limit regulatory fines for not meeting pollution targets and other goals.Thames Water, in addition to the 3750mn it has requested, is asking for an additional £2.5bn until 2030. This would be the biggest equity injection any water company has received since privatisation, 34 years ago.

PwC, the auditors, has warned that there is “material doubt” about whether Thames Water, Kemble Water Finance Limited’s parent company can continue to operate as a going-concern, as they have yet to reach an agreement on a refinancing of loans due in April.

Cochran said on Tuesday that Kemble is a “separate” company.

He said, “Our job is Thames Water. We care about our investors.
Ed Davey of the Liberal Democrats described the company’s operations as “a slow-moving automobile crash”.

He said: “The board should resign immediately and be held responsible for the financial and regulatory covers-ups, as well as destruction of local environment.”