Ofwat questioned Thames Water about how it could justify paying a dividend of £37.5 million to its parent company without breaking rules meant to safeguard consumers and the environment.
The water regulator announced that it was investigating if the dividend, announced on Tuesday, was consistent with the licence requirements of the company. The water regulator has not yet initiated a formal enforcement action.
Ofwat had been informed in advance of the dividend and stated that it had written the water provider last Friday asking for a response by the end the month.
Thames Water claimed that the money was being transferred to a parent firm to pay off its debts and no dividends had been paid to “external investors”.
The Guardian was the first to report on this letter.
The regulator stated: “Following notice that Thames Water paid a dividend, Ofwat investigates whether this payment meets the licence requirements.
“Ofwat requested that Thames Water provide additional information on how the dividend payment meets licence requirements to include service delivery to customers and the environment as well as investment and financial resilience.
We will review the extra information from the company and determine if more action is necessary.
New rules introduced in May of this year prevent water companies from paying dividends until they fulfill their promises to customers and the environment.
The regulator can impose fines of up to 10% of the relevant turnover of Thames Water.
The company stated that it worked with Ofwat to “provide further context and clarity” regarding the decision to pay a dividend.
The company said that it had not paid any dividends to outside shareholders and hasn’t taken one for the past six years. (Since 2017), the priority was to invest in the improvement of service to customers and the protection of the environment.
Our plans do not include any external dividends for shareholders until 2030 at the earliest, in order to support our turnaround.
MPs had previously said that Thames Water would be bringing a representative to Parliament to answer questions.
The Environment, Food and Rural Affairs Committee has asked the company to appear on Tuesday, November 9, to provide an explanation of its financial status. Ofwat was also invited.
Thames Water had warned earlier on Tuesday that it will take time to turn things around and that the debt of the company continued to increase in the first half year.
The largest water supplier in the UK reported a 54% decrease in pre-tax profit, which amounted to £246.4m for the six months ending on September 30th.
The company’s revenues rose by 12 percent to £1.3bn, but spent £1bn in record amounts on network improvements.
The results revealed that the debt load of the country has also increased by 7 percent to £14.7bn.
Interim managers said that “immediate action and radical change” was needed to improve the company’s financial and environmental performance.
They said: “Turning the Thames around will take some time. We cannot deliver everything our customers and stakeholders want at the pace and price everyone wants.
We will keep making difficult decisions to deliver what matters most to our customers and the environment.
The results are just a few days after auditors at Thames Water parent company Kemble Water Holdings warned that the company could run out money next April if investors do not inject more cash.
PricewaterhouseCoopers (PwC) recently published accounts for Kemble, the main company behind Thames Water. These accounts contain a warning about the future of Kemble due to a “material uncertainty.” The concern is that there are currently no plans in place to refinance a loan worth £190m at one of its subsidiary companies.
Thames Water shareholders decided in the summer that they would inject £750m into the company’s finances to boost its finances and stave of the threat of nationalisation.
The company asked for £1bn last year.
Thames Water Utilities’ spokesperson stated: “We have a strong financial position, and we are very fortunate to have shareholders who are so supportive.”
The firm stated that the funding package agreed on in the summer is “subject to certain conditions”. These include the preparation of a detailed business plan which will support a targeted turnaround, delivering performance improvements for customers and the environment over the next 3 years.
The group said that shareholders have “acknowledged the need” for an additional £2,5 billion in equity investments in future regulatory periods.
Sarah Bentley, the former head of the water company, abruptly resigned in June due to concerns about its financial stability.
In June, it was revealed that the government had been preparing contingency plans in case Thames Water failed. This was due to growing concerns that the company would collapse under its debts.
Since privatisation, the company has been burdened with debts. Now it faces higher interest rates on these debts as part of them are linked to inflation.
A possible investigation is planned for the group to determine if it misled lawmakers earlier this year about its financial state and investor support.