Thames Water books £200m dividend bill as cash reserves dwindle
Thames Water is continuing to fight for survival as it searches for investment to help pay down its mountain of debt.
In its annual results for the year to 31 March 2024, the embattled water company confirmed that its liquidity at the end of June was £1.8bn, “sufficient to fund our operations for the next 11 months”.
For the year, the group reported underlying profit before tax of £140m, an “improvement” of £272m from the loss reported in the prior year.
Thames Water also reported underlying revenue of £2.4bn, which reflected an “inflation-linked increase in our charges for water and wastewater services.”
Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) rose 21 per cent to £1.2bn.
During the year, Thames Water said it had spent £2.1bn improving its infrastructure, up 18 per cent and a “record” for the group.
Although the company noted several times throughout the release its lack of liquidity has restricted its ability to pay dividends, it did record a total of £195.8m in dividends paid during the year.
These included: “Two interim dividends totalling £37.5m in October 2023, which enabled Kemble Water Finance Limited and its financing subsidiary to service external debt obligations through to 31 January 2024.”
The figure also included: “Two interim dividends totalling £158.3m in March 2024 to enable Kemble Water Eurobond plc and Thames Water Limited to settle amounts owing to the company for group relief surrendered, and Kemble Water Eurobond plc to make pension contribution payments to the Thames Water Pension Scheme and Thames Water Mirror Image Pension Scheme defined benefit schemes on behalf of the company.”
Thames Water also said: “For the seventh year in a row, no distributions were earned by our external shareholders, who own shares in our ultimate parent company, Kemble Water Holdings Limited.”
The shocking news from Thames Water is likely to push corporate governance reform up the agenda, which has been “talked about but barely acted upon for many years now,” said Lindsey Stewart, director of stewardship research and policy at Morningstar Sustainalytics.
The precarious financial position will “once again raise questions” about both the correct balance to strike between public and private sector contributions, and the right regulation to ensure a return on capital to investors, when it comes to vital national infrastructure, Stewart said.
As for where the new money will come from, Thames Water said it will continue engaging with potential investors and creditors to seek new equity and extend its liquidity runway.
“Thames Water will continue to invest to meet its regulatory and environmental obligations and to improve the operations of the business as we execute our Turnaround Plan,” it confirmed.
“Thames Water is keeping afloat, but its emergency life buoy is deflating as efforts to raise funds from shareholders proves elusive,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown.
Thames Water is saddled with a £18bn debt pile, which has become increasingly difficult to service amid higher interest rates.
The company was thrown into crisis earlier this year after shareholders pulled the plug on plans to invest £500m into the business.
Thames Water submitted a survival plan to Ofwat, the water regulator, back in May. Ofwat is reportedly considering reducing fines on water companies like Thames Water to free up money for investment.
Thames Water’s debt crisis is among the issues facing new business secretary, Jonathan Reynolds.
A source close to the new environment secretary, Steve Reed, told City A.M. that the matter was one for the independent regulator to work with the company “ensure it is financially stable.”
“The election of this Labour government is a reset moment for the water industry,” the source added. “Over the coming weeks and months, this government will outline its first steps to reform the water sector.”
“The new Labour administration will want to avoid ‘nationalisation’ but will have to step in, given that it’s such a crucial part of the country’s infrastructure,” added Streeter.
“It’s likely that emergency plans are being worked on, to establish a publicly owned arm’s length body to run the company, if the financial plug ends up being pulled.”
“The challenges we face are well documented, but our operational and financial performance for the last year show good progress, and these positive results provide the right foundations on which to build and improve,” Chris Weston, chief executive of Thames Water, said.
“We’ve delivered year-on-year improvements in our key water metrics, with leakage at its lowest ever level, and we’re supporting more customers through our social tariffs,” he continued.
“Revenue, EBITDA and operating cash flow all grew strongly, supporting a record £2bn of investment in our infrastructure that will ultimately improve asset resilience, environmental performance, and customer service,” he added.
In April, it was reported that despite the company’s myriad of issues, Thames Water asked the regulator to let it pay up to £2bn in distributions to its investors over the next decade as part of its business plan.
An Ofwat spokesperson said: “This underscores the need for Thames Water to address the two fundamental issues of securing its financial resilience with more equity put into the business and the need to turnaround its poor operational performance.
“Thames Water has a regulatory capital value of £20bn, £1.8bn of liquidity available, annual regulated revenue of £2.4bn and a new leadership team. The draft determinations for the next five years are imminent and will give greater clarity on the future funding for the company, too. Thames Water must pursue all options to seek further equity.
“We are currently investigating the dividend payment the company made at the end of last year and will report our findings in due course. We will also look into the additional dividend and executive payments the company has just reported, if necessary using our new powers to protect customers. In line with the other measures we have in place to protect customers, from April the company has been in a cash lock-up meaning it cannot now pay any further dividends without our consent.”
Liberal Democrat Treasury spokesperson Sarah Olney MP described the situation as a “complete mess”, arguing that the regulator should be blocking Thames Water’s dividend payouts and bill hikes.
“Years of inaction from Conservative Ministers has led to these bill increases and firms getting away with endless sewage dumps and insulting bonuses,” she said.
“It is clear the public want action to be taken to finally crack down on this rogue firm. The government and regulator should listen to this call.”
“It’s interesting to note that Severn Trent was one of the biggest gainers on London markets today with investors perhaps sensing that Ofwat may be persuaded to soften its stance in order to protect the underlying service,” added Danni Hewson, head of financial analysis at AJ Bell.
“How to manage what is undeniably a PR nightmare will be one of the first big tests of the new Labour government which won’t want to be seen as lumping the taxpayer with the problem or the bill.”