Thames Water board approved £150m payout hours before funding U-turn

Thames Water is labouring under £15.6bn of debt and could be temporarily renationalised. Photograph: Geoffrey Swaine/Rex/Shutterstock

The board of Thames Water agreed to pay a £150m dividend hours before its shareholders U-turned on plans to pump emergency funding into the struggling water supplier, the Guardian can reveal.

The water industry regulator is examining the decision by the debt-laden company’s board to sign off the payout at a meeting on 27 March, sources said.

The following day, the company said an imminent £500m injection of funds that had been pledged by its investors would not be paid, amid a standoff with the regulator Ofwat. That decision threatens to tip Britain’s water company into public hands, with Whitehall officials war-gaming its temporary renationalisation.

Ofwat plans to investigate the circumstances around the dividend paid by Thames, sources said. At the time, Thames was already under investigation over its decision to pay a separate £37.5m dividend.

Thames’ fate is one of the biggest issues facing the next government, with Thames labouring under £15.6bn of debt, the bulk of which could be added to the public purse.

Thames said it was too early to know what the outcome of Ofwat’s inquiries into the dividend payment would be.

The company, which has a complex corporate structure, said the payment was made from the regulated company to an intermediate parent company, Kemble Water Eurobond, to “settle a pension top-up payment” and “surrender relief” on tax losses.

In March the company and its shareholders drew heavy criticism when investors refused to pay £500m of promised funding. Michael Gove, the communities secretary, said the leadership of the company had been a “disgrace”.

In December the Guardian revealed that Ofwat was examining a £37.5m dividend paid from its regulated operating company to its ultimate owner, Kemble.

While the £150m payout did not go to Thames shareholders, Ofwat has been clamping down on the flow of cash from ringfenced water companies to holding companies, amid concerns that payouts are weakening the finances of regulated water and sewerage firms.

In May 2023 it modified the conditions of water companies’ licences to stipulate that companies must explain how dividend decisions were made and how they “reflect overall performance, alongside investment and financial resilience needs”. The regulator can take action where a company has failed to meet the conditions.

This month it emerged that Ofwat was considering fining the company £40m over the £37.5m payment on the grounds that it breached those rules on dividends.

Sources close to the situation said a final decision on that possible fine was unlikely to be published before the regulator rules on water companies’ five-year spending plans next month.

Ofwat is due to publish its draft response to water companies’ business plans on 11 July, after a delay caused by the general election. Thames’s annual results need to be published by 15 July.

The company, which serves about 16m households, faces the prospect of a potential special administration, handled by the government, if it cannot raise fresh funds from investors. Officials are drawing up contingency plans for a temporary nationalisation under the codename Project Timber.

A Thames Water spokesperson: “We take our licence obligations very seriously, including those relating to the declaration and payment of dividends.

“In March 2024 we settled with our intermediate parent company, Kemble Water Eurobond, an interim dividend to enable it to settle a pension top-up payment on Thames Water’s behalf and to surrender group relief for full-year 2023 tax losses. These transactions were cash and reserves neutral for Thames Water Utilities Limited, which is the regulated business, and increased the company’s financial resilience.

“Ofwat does not assert any potential breach by Thames Water of its licence and it is too early to know the outcome of Ofwat’s enquiries in relation to this matter.”

Thames said its ultimate shareholders, which include the Canadian pension fund Omers and the British university staff pension scheme USS, had not received a dividend since 2017 and it did not plan an “external dividend” until 2030.

An Ofwat spokesperson said: “We await the company to disclose its financial report including any dividend. We have new powers to act against companies paying dividends that do not reflect companies’ performance for customers and the environment or which compromise financial resilience, and we will use them as appropriate.”

A downgrade by the credit ratings agencies Moody’s and S&P in April meant Thames Water could not pay dividends without breaching its licence.

The water industry has faced prolonged anger from politicians and the public over repeated sewage spills into Britain’s waterways during a period in which it has made significant payments to investors and handed executives large bonuses.