Storm over Thames Water dividend

Warning of hosepipe bans as payout is increased by 22%

The row over big dividend increases from the privatised water companies escalated yesterday after Thames Water announced a 22 per cent hike in its payout to shareholders at the same time as the company, which has the highest leakage rates in the industry, unexpectedly warned of possible hosepipe bans.

But Thames softened its opposition to the windfall tax, arguing that it could afford to pay a levy of pounds 150m without having to cut back on investment. It was the first time a privatised utility had publicly named an "acceptable" figure for its windfall tax liability.

Thames was last night embroiled in another conflict with Ian Byatt, the water industry regulator. In his annual report, published yesterday, Mr Byatt again said he was concerned at unsustainable dividends. He said companies "should fulfil their investment programmes and that unjustifiably high dividend increases do not undermine that."

Bill Alexander, Thames managing director, said Mr Byatt had no responsibility to limit dividend payouts, despite his recent criticism. "The regulator can have a view on dividends but he's not required to regulate it. It's not within his remit. It would be crazy to have dividend controls on top. How profits are paid out certainly isn't part of the regulatory regime at all."

This is the second confrontation between Thames and Ofwat this year. The group was the only water company to refuse to voluntarily limit bill increases from April after failing to meet investment obligations. Welsh Water, North West, Northumbrian, Severn Trent, South West Southern Yorkshire had all complied with the request.

The 22 per cent dividend hike, to 34.4p a share, was the highest in this year's water company reporting season, taking the total shareholder payout to pounds 132m. The company reported a 19 per cent rise in profits before exceptional charges to pounds 384m, while international businesses made profits of pounds 2.8m, compared with losses of pounds 38m the previous year. Thames shares rose 6.5p, to 677.5p.

The company defended the dividend increase, arguing that a quarter was funded by international earnings, while the payout from the main regulated domestic business fell by 8 per cent. About half the dividend hike reflected the fact that Thames had bought back pounds 225m worth of its shares last year.

Thames was also forced to defend its leakage record as it warned it could have to impose its first hosepipe and sprinkler bans for 6 years, starting from next month. In April the company had stated it did not expect to impose water restrictions, but Mr Alexander said the policy may have to change because of "exceptionally" low rainfall. Reservoirs were 87 per cent full, but only by taking water from the river Thames.

"If we don't get substantial rain in the next month we'll have to ask people not to use sprinklers and hosepipes. The problem is we need rain," he said. Ironically the warning came during the wettest June in the capital for several years.

Leakage rates had fallen from a peak of 38 per cent in 1995-96 to about 28 per cent after the company began a pounds 200m repair programme with 800 staff. Another measure is to move 100,000 households with high water demand onto meters each year.

However, Thames again refused to adopt mandatory leakage targets. Some other companies have already adopted such targets after the government signalled its intention to make them compulsory in its recent "water summit." Mr Alexander said his company's voluntary target of 20 per cent leakage was "unprecedented" for any capital city. "We have extremely dry summers. Our pipes are in the same clay that cracks houses and it also cracks our pipes...Why should I agree to mandatory targets? What happens if I agree to mandatory targets and I fail?"

Customer groups attacked the leakage rates, but said hosepipe bans were preferable to tougher restrictions on supply made later. Andrew Milne from the Ofwat Thames region customer committee said: "Thames Water must reduce its leakage rates."

The company's comments on the windfall tax will surprise other utilities. In a letter to the Treasury, published yesterday, it said it accepted the government's electoral mandate and was ready to pay a "fair share of the tax." David Luffrum, finance director, said this meant spreading the bill over a wide number of utilities, including British Telecom. "The tax should apply to all the privatised companies. BT have got competition around the margins but they're still a regulated company all the same. I wish I had their growth."

In a surprise move he said Thames could afford to pay a pounds 150m tax bill, representing 3 per cent of a pounds 5bn tax, which he argued should be based on company profits in the five years after privatisation.

"The balance sheet will take another pounds 150m in debt. I'm answering the question `would that force Thames to reduce our investment programme?' and the answer is probably not."

How much they are leaking

Company Leakage 1995-96 % Leakage target 1997-98

(million litres per day) (million litres per day)

Anglian 236 20.1 211

Welsh Water 413 37.9 54

North West 789 33.5 705

Northumbrian 190 23.6 187

Severn Trent 632 28.7 410

South West 142 26.1 110

Southern 120 18.7 100

Thames 1109 38.6 962

Wessex 133 30.6 124

Yorkshire 485 33.4 434