Thames Water hit with £123m of fines over sewage and dividend breaches

As Ofwat imposes record fine for environmental failing, minister says ‘era of profiting from failure is over’

Thames Water has been hit with a record £104m fine over environmental breaches involving sewage spills, after failing to operate and manage its treatment works and wastewater networks effectively.

The water regulator Ofwat confirmed on Wednesday that it was issuing the debt-laden utility with £123m of penalties that would be “paid by the company and its investors, and not by customers”.

That total included an £18.2m fine for breaking dividend rules, the first of its kind in the industry, which was first reported by the Guardian in December. Ofwat said the company had paid out cash to investors despite having fallen short in its services to customers and its environmental record.

The UK’s largest water company is in a desperate race to raise funds and find new buyers to stave off the risk of being renationalised, and has urged the regulator to let it off paying hundreds of millions of pounds of fines to make it more attractive to investors.

Ofwat said its investigation had uncovered failings around Thames’s handling of sewage and wastewater, which amounted to a “significant breach” of its legal obligations. The water regulator for England and Wales added that Thames had caused an unacceptable impact on the environment and customers.

“The company also failed to come up with an acceptable redress package that would have benefited the environment, so we have imposed a significant financial penalty,” the Ofwat chief executive, David Black, said. “This decision provides certainty for the company for both its past failures and what we expect from the company to comply with its obligations in future.”

Black added: “We are clear that dividends must be linked to performance for customers and the environment. We will not stand by when companies pay undeserved dividends to their shareholders.”

Finances at the water company, which has 16 million customers in the London and Thames Valley regions, have been left threadbare after previous shareholders siphoned out billions of pounds of dividends and it was hit with hefty fines.

Thames is currently under a “cash lock-up” after its credit rating fell below investment grade, which restricts how it distributes cash to investors, including any future owners. Bosses must ask formal permission before giving any more cash to shareholders, until its ratings improve and it meets further requirements in its licence.

It is still in talks with its preferred bidder, the US private equity group KKR, to take a stake in the business. Ofwat said the turnaround process provided an “opportunity to break with the past”.

Earlier this month the chair of Thames, Adrian Montague, told MPs that last year the utility had come “very close to running out of money entirely”. He also said creditors had insisted that large bonuses be paid to senior bosses out of an emergency £3bn loan secured in February, but that claim was withdrawn days later, as were the retention payments.

The environment secretary, Steve Reed, said the total penalties announced on Wednesday represented the “toughest crackdown on water companies in history”. He added: “Last week, we announced a record 81 criminal investigations have been launched into water companies. Today, Ofwat announce the largest fine ever handed to a water company in history. The era of profiting from failure is over.”

James Wallace, the chief executive of River Action, called for Thames Water to be put into a special administration regime, a form of temporary nationalisation. He said: “Thames Water poured sewage into our rivers for nearly 300,000 hours last year while racking up over £22bn in debt. It has ripped off customers, damaged the environment and failed to invest in solutions.

“At last, we are seeing a government using the law and punishing a major polluter. But nothing will change unless the privatisation of Thames Water stops.”

Tim Farron, the Lib Dem environment, food and rural affairs spokesperson, said Thames’s failures were “shocking but hardly surprising” and also called for nationalisation.

“This should be the final nail in the coffin for Thames Water,” he said. “It needs to be turned into a public benefit company and Ofwat needs to be scrapped and replaced with a real regulator with teeth.”

Responding to the fines, a Thames Water spokesperson said: “We take our responsibility towards the environment very seriously and note that Ofwat acknowledges we have already made progress to address issues raised in the investigation relating to storm overflows.

“The dividends were declared following a consideration of the company’s legal and regulatory obligations. Our lenders continue to support our liquidity position and our equity raise process continues.”

Cover photo:  A Thames Water sewage treatment works in London. Photograph: Ben Stansall/AFP/Getty