The water regulator has called out Thames Water over its dividend policy, fining the business £18m for failure to comply with its P30 licensing conditions and paying shareholders dividends regardless.

In October 2023 Thames Water paid £37.5m in dividends, followed by a further £158.3m in March 2024 which Ofwat said did not comply with the new Licence Condition P30, introduced in 2023.

Thames Water Utilities Holdings Limited’s (TWUL) board paid the £37.5m to its holding company in October 2023 despite inadequate service levels, bills rising to never-before-seen levels and waste spillages occurring all over the country.

Dividends should have only been paid if service delivery for customers and the environment was on track, as well as meeting other obligations about profitability and effective management of risk set out in the P30 conditions.

On dividends in particular P30 states ‘that dividends declared or paid reward efficiency and the effective management of risks to the Appointed Business. For the purpose of this licence condition, dividends refer to any distributions declared or paid in respect of any ordinary shares or preference shares.’

But the Thames Water board ignored this and used the dividends to bail out its holding company and ultimate owner Kemble Group, which is owned by a number of sovereign wealth funds, and institutional investors.

In a document provided to Ofwat by Thames Water, the company stated: ‘TWUL was not obliged to pay dividends to service the Kemble Group’s debt’, adding the group’s ‘inability to service its debt interest would lead to adverse consequences for Kemble Group’.

This happened again in March 2024 when Thames Water paid out a further £158.3m in dividends to Kemble Group.

The Ofwat report stated: ‘Whilst the evidence provided by TWUL would appear to demonstrate that the board did consider these obligations more explicitly than it had in October 2023, Ofwat nevertheless, has found that in that instance too TWUL failed to comply fully with Licence Condition P30.’

David Black, chief executive of Ofwat, said: ‘We are clear that dividends must be linked to performance for customers and the environment. 

‘We will not stand by when companies pay undeserved dividends to their shareholders. This is the first time we have used these new powers, and this sets the standard. We will protect customers from water companies that seek to take money out of their businesses, where their performance does not merit it.’

The original penalty for abuse of dividend payments was 1% of the company’s turnover as Ofwat considered the breach of P30 as ‘sufficiently serious to warrant the imposition of a financial penalty under section 22A WIA91’.

But as P30 is a new condition applied by Ofwat, the regulator treated this as a ‘mitigating factor’ and reduced the penalty to 0.75% of the turnover, £18.2m. ‘We also recognise that this is the first time we have intervened in relation to this new licence condition. In this instance, therefore, we consider this to be a mitigating factor’, said Ofwat.

In April 2024 TWUL had its credit rating downgraded, which resulted in ‘cash lock up’ arrangements due to obligations under Licence Conditions P28 and P29. As a result any dividend payment had to be approved by Ofwat until the credit rating improved.

When approving the dividends TWUL said it had to issue them to the holding company to pay dividends and interest payments on debt.

But after Ofwat’s first assessment of this argument it said the TWUL board did not give any ‘meaningful consideration to all of the requirements of Condition P30 (and in particular to Condition P30(2))’.

Ofwat said: ‘The crux of our concern is the weight which TWUL afforded to the risks of non-payment of dividends to its holding company which was already in financial distress, as against the lack of any meaningful consideration of whether, and how, those dividend payments could be justified given to the company's serious and ongoing performance issues and weak financial resilience.’

It also noted that where a company is significantly underperforming then the board should look to invest in improving its services for customers before shelling out millions in dividend payments. The regulator also said when there is a risk of ‘significant service failures’ then dividends should be restricted to avoid fines such as the one issued to Thames Water.

Thames Water was also fined £104.5m for mismanagement and maintenance failures related to its sewage works, and excessive sewage spills, which was a separate Ofwat investigation into the business.

Black said: ‘This is a clear-cut case where Thames Water has let down its customers and failed to protect the environment. Our investigation has uncovered a series of failures by the company to build, maintain and operate adequate infrastructure to meet its obligations.

‘The company also failed to come up with an acceptable redress package that would have benefited the environment, so we have imposed a significant financial penalty.  

‘This decision provides certainty for the company for both its past failures and what we expect from the company to comply with its obligations in future. 

‘The company is seeking new buyers to fund its turnaround to provide better services for customers and the environment by improving operational performance and financial resilience. This provides a clear opportunity to break with the past, Thames Water will now need to correct the issues our investigation has identified.’