The UK’s biggest water company has been fined £18.2m for “unjustified” dividends which the regulator said broke shareholder payment rules.

Thames Water has been hit with the penalty by water regulator Ofwat over the combined £195.8m in dividends paid to shareholders in October 2023 and March 2024.

It’s the first time Ofwat has used such enforcement powers to ensure firms link shareholder payments to their company performance. The powers came into effect in May 2023.

As well as the fine, £131.3m in dividends will be clawed back by Ofwat as it said Thames Water “failed to consider” the wider impact of the dividend issuance.

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The regulator said Thames Water breached obligations under its licence condition.

Since the water company’s credit rating dropped below investment grade in April it has been unable to make further dividend payments without Ofwat’s approval.

The announcement is intended to serve as a warning to other water companies, Ofwat said.

Its chief executive David Black said: “Ofwat’s £18m penalty and clawing back the value of £131m 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.”

Thames Water said it took its licence obligations “very seriously”, “including those relating to the declaration and payment of dividends,” a spokesperson said.

It said it only made the payments after considering “the company’s legal and regulatory obligations”.

What’s going on at Thames Water?

Thursday’s penalty was the latest in a series of fines for the troubled utility. In August it was slapped with a £104m levy for sewage discharges. A year earlier in July 2023 it was fined more than £3m after admitting to polluting rivers.

Thames Water has found itself in a perilous financial position and this week won High Court approval to pursue a £3bn emergency loan.

If approval had not been granted Thames Water said it would run out of cash by 24 March and would likely be pushed into a government-backed special administration regime, a form of state ownership.

The penalty comes on the same day all English and Welsh water utilities had their business plans for the next five years agreed.

Average water bills will increase by 36%, equivalent to an extra £31 each year, and an investment of £104bn.

How much bills will increase depends on where you live and the settlement agreed for each local supplier.

Ofwat said it did “not at all” consider Thames Water’s financial position when making its bill rise and investment determination.