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Ofwat finds Thames Water has broken dividend payment rules

In October 2023, Thames Water made interim dividend payments totalling £37.5 million to its holding company, Thames Water Utilities Holdings Limited. In March 2024, the company made further dividend payments amounting to £158.3 million from which they received non-cash benefits

  • Penalty of £18 million sends clear signal to industry that companies must link dividend payments to performance
  • Ofwat to claw back value from £131.3 million of dividend payments using the price control so customers do not lose out on tax benefits

Ofwat has today (19 December 2024) announced its proposed decision which finds Thames Water to be in breach of its obligations under Licence Condition P30.

This is the first time Ofwat has used new powers which allows the regulator to take enforcement action against water companies that don’t link dividend payments to performance. Whilst greater consideration was given by the Board of Thames Water to their legal and regulatory obligations for the second payment, Ofwat has provisionally found that in making both the October 2023 and March 2024 dividend payments, it failed to comply with these new obligations which came into effect in May 2023.

Ofwat is therefore proposing to impose a penalty of £18.2 million on Thames Water. In addition, Ofwat will be able to ensure that customers do not lose out as a result of the company surrendering £131.3m of its tax losses as part of the March 2024 dividend payment through an adjustment in the price control.

Thames Water’s credit rating is currently below investment grade; it is now in cash lock up and no further dividend payments can be paid by the company without first obtaining approval from Ofwat. This arrangement will continue until Thames Water’s credit ratings improve and meet the requirements in their licence.

Ofwat’s Chief Executive David Black said:

“Ofwat’s £18 million penalty and clawing back the value of £131 million in unjustified dividend payments is a clear warning to the whole sector: We will take action against companies who take money out of these businesses, where performance does not merit it.”

Notes to editors

  • Please find the consultation on Ofwat’s provisional decision notice here: https://www.ofwat.gov.uk/consultation/notice-of-ofwats-proposal-to-impose-a-financial-penalty-on-thames-water-as-a-result-of-its-contravention-of-condition-p30-of-its-licence/
  • In April 2024, Thames Water had its credit rating downgraded, resulting in its entering “cash lock up” arrangements. Whilst the company is in cash lock up, the regulated company is required to seek Ofwat approval before declaring or paying a dividend. This arrangement will continue until Thames Water’s credit ratings improve. This arrangement enables Ofwat to ensure that any dividends paid comply with the requirements of Licence Condition P30.
  • The March 2024 dividend payment consisted of two elements. Ofwat accepts that the dividend payment of £27.1 million to its holding company to enable the payments to Thames Water’s defined benefit pension schemes on its behalf does not pose a concern in terms of its compliance with the Licence Condition. However, Thames Water has failed to consider the wider impact of the payment of the £131.3 million dividend on the regulated company.
  • In relation to the March 2024 dividend payments and Ofwat’s concern that the surrender of tax losses by Thames Water to other Kemble Group companies has resulted in the extraction of value from the regulated company, Ofwat has the ability to recover this value, via an adjustment in the price control, to ensure that customers are protected. This will ensure that customers do not lose out as a result of the losses being transferred out of Thames Water that could otherwise be offset against its tax liabilities in the future.
  • Ofwat recognises that this is the first time it has intervened in relation to this new licence condition and therefore, Ofwat considers this to be a mitigating factor. On this basis, the regulator has proposed a reduction in the penalty figures to £18.2 million.
Channel website: http://www.ofwat.gov.uk/

Original article link: https://www.ofwat.gov.uk/ofwat-finds-thames-water-has-broken-dividend-payment-rules/

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