Thames Water is being investigated by the regulator, Ofwat, over its payment of dividends to shareholders amid its mounting debt crisis.
The firm paid £37.5m in dividends to its holding company in order to finance debt, according to the company’s interim results released on Tuesday.
It comes as the utility firm demanded the right to increase customers’ bills by up to 40 per cent.
New licence conditions on dividends were brought in by Ofwat in May, amid concerns about underperformance and environmental damage in the sector.
i understands Ofwat wrote to Thames Water earlier this month about the payment, and has now opened an investigation.
Ofwat has the ability to impose a fine of up to 10 per cent of Thames Water’s turnover. However it is thought any potential penalty would be smaller, given the proportion of the dividend payment to the company’s total turnover.
Thames Water reported turnover of £1.2bn for the year to the end of September, up 12 per cent on the previous year.
An Ofwat spokesperson 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.”
Thames Water was contacted for comment but had not responded at the time of publication.
In interim results released on Tuesday, the utility company announced profits had halved to £246m in the first half of the year, with debts rising 7 per cent to £14.7bn.
Company executives said bill rises were needed to protect the company‘s future, amid mounting pressure on it to fund improvements to how it deals with sewage.
It has projected that price rises of around 40 per cent to water bills may be necessary, according to figures presented in its business plans.
Cathryn Ross and Alastair Cochran, interim co-chief executives at Thames Water, said: “Turning around 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.”
Why is Thames Water being investigated? Rules on dividends explained
In May, Ofwat introduced new rules to only allow for companies to pay dividends if conditions on quality of service, and on environmental and financial performance, are met.
A dividend is where owners of a company take a financial payment from the firm, usually following a period of strong performance. However, Thames Water has used dividends to refinance debt, by moving money within its byzantine corporate structure.
The firm paid £37.5m in dividends to its holding company in order to finance debt, according to the company’s interim results released on Tuesday.
The new Ofwat rules followed concerns that water company owners are profiting despite worsening environmental conditions and poor customer service, following strong criticism from campaigners including Feargal Sharkey.
Ofwat wrote to Thames Water last week asking the firm to justify the dividend, in the context of quality of service and environmental performance.
Through the new powers, Ofwat can fine a company up to 10% of turnover, but it may be less depending on the size of the infringement.
Thames Water’s board took the unusual step of warning regulator Ofwat not to block any attempt to increase bills.
Its comments published on Tuesday said: “On 2 October 2023, [Thames Water] submitted its business plan to Ofwat… There is no assurance at this point in time as to what funding will be allowed.”
The statement goes on to say that Thames Water is entitled to secure “reasonable returns on its capital” that allows it to “offer investors an opportunity to earn the returns required to finance it”.
It adds that “Ofwat is required to… ensure that Thames Water is able to finance the proper carrying out of its functions.”
This means price increases are necessary, to allow it to deliver the investment required in infrastructure, the statement adds.
Water industry executives have become increasingly frustrated at public criticism over sewage issues, which it claims is a result of regulators focusing on lower bills rather than higher environmental standards historically.
Thames Water also disclosed it is still subject to investigations by Ofwat and the Environment Agency over sewer overflows and environmental issues, with further financial penalties possible.
The company disclosed that its pollution record had “deteriorated” in the last year, with category 1-3 pollutions increasing 18 per cent to 257 incidents.
A Thames Water spokesperson told i: “In October 2023 we decided to pay our immediate parent company, Thames Water Utilities Holdings Limited an internal dividend to service group debt obligations. We informed Ofwat about our decision and are currently working with Ofwat to provide further context and clarification around our board’s decision and its reasons. We take our licence obligations very seriously, including those relating to the declaration and payment of dividends.
“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. Our plans assume no external dividends to shareholders until at least 2030, to support our turnaround.”