Britain’s biggest water company has been told it faces a fine of more than £40m over the payment of a shareholder dividend in spite of its poor performance.
Sky News has learnt that Ofwat notified Thames Water last month that it was minded to impose the penalty for breaching rules on the payment of dividends.
The development will pile further pressure on Thames Water as it limps towards a potential temporary nationalisation under a debt mountain of more than £15bn.
The fine being considered by Ofwat is notable because it is larger than the £37.5m payout made to shareholders last autumn, according to a Thames Water insider.
The company has the right to appeal over the proposed fine before a final decision is made, and the timing of the general election on 4 July means that a final ruling is now unlikely until after that date.
Ofwat has already postponed its draft determinations on the five-year spending and investment plans of Britain’s privately owned water companies until after the election.
It had been due to issue its initial decisions on 12 June.
Its final determinations, which are expected in December, will shape investors’ decisions about whether they can commit capital to fund the companies over the following half-decade.
Thames Water has been plunged into the biggest crisis in its history by its shareholders’ judgement that the company has become “uninvestible” as a consequence of the regulatory framework set by Ofwat.
The company, which serves more than 15m customers across London and south-east England, counts sovereign wealth funds and pension funds from Australia, Canada, China and Britain among its shareholders.
This week, the Financial Times reported that Ofwat was considering the introduction of a “recovery regime” for financially troubled water companies to enable them to survive.
This would entail reducing future financial penalties for water leaks and pollution – both of which have stained Thames Water’s reputation in recent years.
Ofwat has refused to comment on the report.
Last month, Sky News revealed that representatives of Thames Water’s multinational syndicate of shareholders were quitting as directors of its corporate entities after refusing to inject the billions of pounds of funding required to bail it out.
The payment of the controversial dividend from Thames Water Utilities Limited, the operating business, to Kemble Water and its affiliates, is understood to have fallen foul of rules overseen by the regulator, which aim to avoid rewarding shareholders during periods of poor performance.
Ofwat’s intention to take action against Thames Water over the dividend payment was reported last month but without any indication of the likely size of a penalty.
Thames Water refused to comment this weekend on the specifics of the proposed fine, but has previously said: “We take our licence obligations very seriously, including those relating to the declaration and payment of dividends.”
A default on part of its holding company debts in April has raised the prospect that Thames is heading towards special administration, a form of insolvency that would effectively leave the government liable for managing a company which serves nearly a quarter of Britain’s population.
Its bonds have plummeted to record lows amid fears that lenders face step losses in any bailout deal.
The prospect of temporary nationalisation will place it among the most pressing domestic challenges facing the next government.
Last summer, Sky News revealed that Whitehall officials had started drawing up contingency plans for Thames Water’s collapse amid fears that it might not survive.
It has since parachuted in Chris Weston, the former Aggreko chief executive, as its new boss.
Ofwat declined to comment on Saturday on the proposed penalty.