Thames Water hits back at criticism of finances

Thames says it operates to a corporate governance code that is “directly comparable to listed companies”

Thames Water has hit back at criticism of its finances, which appeared in the Financial Times last week.

An article in the newspaper claimed Thames had paid £1.16 billion in dividends between 2006 and 2015 – a return that equates to about half of the £2.3 billion of equity paid by Macquarie to buy the firm. It added: “The paydays for the investors who control Thames Water coincided with a period when the company often paid no corporation tax, paid executives massive remuneration packages and doubled its debt.”

The article quoted former Ofwat boss Ian Byatt as saying: “Nearly everyone on the [Thames Water] board are investors and one cannot resist the idea that they are more concerned with money than with serving the public. The public interest is so easily forgotten and consumers are paying more for their water bills because of it.”

Retaliating against the claim, Thames insisted it operates to a corporate governance code that is “directly comparable to listed companies”. “This includes the board having a majority of independent directors, in line with good practice and which fulfils our regulatory requirements,” a spokesperson said. “The holding company, Kemble Water, is domiciled in the UK, as are the four intermediate companies in the structure. The activities of these companies, and all group companies, are entirely transparent to UK authorities and they are fully subject to tax in the UK.”

One specific area of disagreement centres on the pay of the chief executive and chief financial officer.

The article claimed executive pay at the water utility has “ballooned in recent years”, and that its removal from the stock market in 2006 means such issues “pass unchallenged”. It said former chief executive Martin Baggs received a 60 per cent pay rise from £1.29 million in 2014 to more than £2 million in 2015, and former chief financial officer Stuart Siddall received a pay rise from £785,000 to £1.4 million in the same period.

However, Thames insisted that Bagg’s total remuneration package went up approximately 5 per cent between 2013/14 and 2014/15, and his basic pay went up just 2 per cent. The company said the reported figure in 2014/15 is higher because it is the total amount which vested in 2015, not the amount that was actually paid that year – which was £349,690. The LTIP is a long-term incentive payment to reward performance, normally over three year cycles. Total pay for 2014/15 excluding LTIP, Thames said, was just over £1 million.

“We were required to report the full amount which vested in 2015 in the 2014/15 annual report. This amount reported in 2014/15 relates to April 2012 to March 2015 and is paid in three equal amounts in 2015, 2016 and 2017. This is why it shows a 0 for 2015/16.”

The newspaper article said Thames’s pensions liabilities “swung from a £26.1 million surplus in 2008 to deficits of £65 million in 2009 and £260 million in 2016, potentially leaving employees exposed in the event of a crisis”.

Thames responded, saying that between March 2015 and March 2016, its pension deficit reduced by around £90 million to £260 million – “partly as a result of financial market movements and partly due to our deficit repayment contributions”. “We have a recovery plan, as agreed with the trustees, in place to sustainably reduce our pension deficit to zero,” a spokesman said. “In total, we paid £45.6 million into our pensions relating to 2015/16, which included both regular contributions and deficit repair payments. The 2016 triennial valuation of our pensions is currently underway.”

Ofwat said decisions about an overall capital structure or individual financing for a water company should, subject to all relevant legislation, “remain matters for the company”, so “it is for the management and investors of the regulated water company to decide on its own optimal financial structure”.

A spokesperson for the regulator said: “Ofwat sets out limitations in each regulated company’s licence which seek to protect the transfer of undue risk to consumers. For any regulated water company, including Thames Water, it is important that it maintains a robust and stable financial position in view of the potential harm to consumers were a company to lack financial resources to maintain its assets and deliver services.”