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Thames Water is facing fresh scrutiny from lawmakers and regulators over the state of its finances.
Ofwat, the watchdog, on Tuesday said it was investigating a £37.5mn dividend that Britain’s biggest water company paid in October. MPs separately said they would haul Thames Water’s bosses to a hearing next week to “seek clarification” over the nature of £500mn injected by the utility’s shareholders.
Britain’s largest privatised water utility has a byzantine corporate structure with multiple layers, only one of which is regulated by Ofwat. Announcing half-year results on Tuesday, Thames Water said it had paid a £37.5mn dividend from the regulated company that ultimately reached its parent entity.
Ofwat said: “Following notification that Thames Water has paid a dividend to shareholders, Ofwat is investigating whether this payment meets its licence requirements.”
The probe follows the introduction of licence conditions in May that requires companies to take account of requirements to look after customers and the environment before paying dividends, and ensure “financial resilience over the long term”. If Thames Water is found to have breached rules it could face a fine equivalent to 10 per cent of turnover.
Thames Water insists no external dividends were paid, and will not be paid until 2030.
Concerns have risen over the financial stability of Thames Water, which provides water and sewerage services to about a quarter of the population in England. The company has faced larger financing costs on its £14.7bn debt pile, as well as bigger labour and energy bills. Meanwhile, it also faces an outcry over sewage pollution.
Fears for the company’s future deepened last week when the Financial Times revealed Thames Water had presented a £515mn shareholder loan to its unregulated parent group, charging 8 per cent interest, as fresh equity. The parent, Kemble Water, then cascaded £500mn of this borrowed money down the chain of holding companies that own Thames Water into the regulated utility as equity.
The Environment, Food and Rural Affairs Committee on Tuesday said it has demanded Thames Water bosses return so MPs can examine whether the company misled parliament when it told the committee in July that shareholders had provided £500mn of equity.
The parliamentary committee will also scrutinise the future financial viability of Thames Water. Ofwat has also been told to attend so that MPs can investigate “the rigour of its regulatory oversight”, the cross-party committee of MPs said.
Thames Water insisted the £500mn came into the “ringfenced entity” as equity and “there is no obligation to repay this money”. It says it has total liquidity of £3.5bn at the end of September, down from £4bn in March.
Nick Hood, a corporate restructuring adviser at Opus Business Advisory Group, said the £515mn to Kemble was “categorically a loan and is shown as such in the accounts”.
“The point is that the vulnerability of Thames Water as the actual supplier to consumers depends on the stability of the whole group,” he said.
The investigations come as first-half results on Tuesday underscored the company’s financial and operational fragility. Pre-tax profits fell 54 per cent to £246mn in the six months to September 30 while revenues climbed 12 per cent to £1.2bn. Pollution incidents and customer complaints had increased and the company admitted its was struggling with “frequent failures in our ageing infrastructure”.
Thames Water had previously said investors — including private equity, sovereign wealth and pension funds — agreed to inject £750mn by 2025 subject to conditions to stabilise the finances and deliver infrastructure improvements.
But Alastair Cochran, finance director and interim co-chief executive, on Tuesday said the £750mn infusion was still to be confirmed, despite the submission of the company’s business plan to regulator Ofwat in October.
“Investors are looking for some comfort from Ofwat that it will support that business plan,” he said. “They will take a pragmatic view depending on the feedback they get.”
The company has asked Ofwat for a 40 per cent increase in customer bills by 2030 to underpin the £750mn investment.
Shareholders are waiting to hear about the bill increases and have asked for restrictions on regulatory fines for missing pollution and other performance targets. In addition to the £750mn, Thames Water has asked for a further £2.5bn by 2030, which would be the largest equity injection into any water company since privatisation 34 years ago.
Auditors PwC has warned there is “material uncertainty” as to whether Thames Water’s parent company, Kemble Water Finance Limited, can continue as a going concern as it is yet to agree a refinancing deal on loans due in April.
Cochran insisted on Tuesday that Kemble was a “separate company”.
“Our job is to worry about Thames Water but clearly we care about our shareholders,” he said.
Ed Davey, leader of the Liberal Democrats, described the company as a “slow-moving car crash”.
He added: “The board must resign with immediate effect and must be held accountable for financial and regulatory cover-ups as well as the destruction of local environments.”