UK regulator 'minded' to investigate Thames Water shareholder payments as part of wider probe

Under new rules introduced last year, water companies with poor financial and environmental records aren’t allowed to pay dividends. Thames has the worst record on leaks and is struggling to stem sewage spills.

A UK regulator said it is “minded to” investigate Thames Water payments to shareholders as part of a wider probe.

Ofwat’s move to take action against struggling utility Thames Water, comes as questions have arisen around why shareholders were paid millions of pounds in dividends last year despite poor performance.

If Ofwat formally decides there’s a rule breach, the utility could be fined and a significant penalty would put further pressure on its finances. The company, which supplies London with water, is already saddled with debt and has a limited pool of cash to run operations after shareholders refused to inject any more.

A scenario where Thames Water can’t pay the fine could speed up the point at which the government needs to step in to help stabilise the company.

Ofwat has said some form of action is likely after the company paid investors £37.5m (€43.6m) in October last year, according to a person familiar with the matter. Thames still has a chance to dispute the findings.

Under new rules introduced last year, water companies with poor financial and environmental records aren’t allowed to pay dividends. Thames has the worst record on leaks and is struggling to stem sewage spills.

“We take our licence obligations very seriously, including those relating to the declaration and payment of dividends,” a spokeswoman for Thames Water said in an emailed statement.

The utility has long argued that it doesn’t pay dividends to external shareholders, only to its parent company. However, Ofwat says it doesn’t differentiate between internal and external payments.

“We have reached the next stage of our inquiries,” an Ofwat spokesman said in an emailed statement. “We have notified Thames Water of our findings in light of the evidence we have to date.” 

Since Ofwat’s probe began in December, Thames Water’s financial situation has worsened significantly. The company is desperately trying to drum up new sources of equity after its shareholders declared in March that the company’s business plan was “uninvestible”. 

Adding to the company’s woes, Michael McNicholas, a managing director at Canadian pension fund OMERS Infrastructure, quit his role as non-executive director at Thames on Thursday. OMERS is the biggest shareholder of Thames Water Utilities and his departure further underlines the lack of support from key investors.

Thames has been paying dividends for years to help service debt at its parent company Kemble Water, though it doesn’t pay external shareholders. Those dividends are Kemble’s only source of income and chairman Adrian Montague said they were paid to keep Kemble “secure”. 

“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,” the Thames spokeswoman said. “Our 2025-30 business plan, submitted to Ofwat as part of its price review process, assumes no external dividends to shareholders until at least 2030, to support our turnaround.” 

A decision from Ofwat had been expected in March but has been delayed until now. It comes a day after MPs on the UK Parliament’s Environmental Audit Committee criticised Ofwat chief executive, David Black, for not doing enough to stop Thames from paying dividends to shareholders.

Consultants at restructuring advisory firm Alvarez & Marsal are working with Kemble as the company seeks to start talks with lenders and bondholders over its debt structure.

- Bloomberg