Britain’s privatized water and sewerage companies paid out 1.4 billion pounds in dividends in 2022, up from 540 million pounds the previous year, despite rising household bills and a wave of public criticism over sewage leaks.
The figures, based on a Financial Times analysis of the accounts of the 10 biggest water and sewerage companies, are higher than total dividends in the year to the end of March 2022. This is because several have multi-layered corporate structures with multiple subsidiaries, only one of which — the Operating Company — is regulated by Ofwat.
Maintaining dividends means that there is less money from customer accounts for investments in critical infrastructure such as wastewater treatment and water mains.
Complex arrangements allow providers to distinguish between internal dividends — payments between intermediate holding companies within the group — and external dividends to private equity, sovereign wealth and pension funds that own the entire water and sanitation business, including the holding companies.
Byzantine structures are one of the reasons Ofwat is concerned about transparency in the sector. It has updated the license terms to be able to block dividends from April 2025 if the company appears financially vulnerable. It will also require boards to consider environmental and customer objectives when deciding to make payments.
Although the water monopolies argue that internal dividends are used to service debt and other costs, Ofwat says it “does not recognize the distinction” and will look at any dividends that leave the regulated company “regardless of how they are used by the group and whether any amounts are paid to ultimate shareholders.’
David Hall, a visiting professor at the University of Greenwich, said monopolies “call them dividends because they are dividends.”
Dividends “are paid by households and businesses through their accounts and [ . . . ] benefit group companies wholly owned by the ultimate shareholders.”
Thames Water, the biggest water monopoly, paid out £37m of ‘internal dividends’ to its parent company in the year to 31 March 2022. This is up from £33m in the previous 12 months, despite announcing that ‘external shareholders’ would not have received dividends for five years.
The company, whose owners include China Investment Corporation, said any dividends would be used to “service debt obligations and group costs associated with other companies in the wider Kemble Water group [which includes Thames Water]”.
Since being sold debt-free in privatization three decades ago, the companies have amassed £60.6bn of debt, according to Ofwat.
At the same time, total waste water infrastructure spending by the 10 biggest companies – excluding Thames Tideway – failed to grow significantly. Average annual investment in wastewater was £295 million in the 1990s, £297 million in the 2010s and £273 million in the 2020s to date.
Now costs – including interest payments – are rising, adding pressure on companies’ finances just as they face demands to increase investment in infrastructure.
It is difficult to trace exactly where the money from water bills goes, says Sir Dieter Helm, professor of economic policy at Oxford University.
“These complex financial structures are not transparent or clear and have not delivered clear benefits to clients,” he says. “Water companies have been running hoops around Ofwat for years.”
Ofwat said its new powers would allow it to take action if companies paid dividends that did not reflect performance, while Anglian Water said it “fundamentally disagrees” that any transactions are opaque. Thames Water said it “has a strict, performance-related dividend policy monitored by Ofwat”.
“The idea that money is being diverted from frontline infrastructure development is simply false,” Anglian added. “The regulator determines the level of infrastructure development and monitors the outcome.”
By any definition, however, dividends remain high. Anglian Water’s accounts showed it offered a £169m dividend to its parent company last year, although it said only £91.8m would go to ultimate shareholders.
“This marked a return to paying dividends for the first time since 2017,” Anglian said. However, accounts show that £2.5bn has been paid out in ‘internal’ dividends over the past five years.
Anglian Water, owned by a group of pension funds and the Abu Dhabi Investment Authority, said the word “dividends in relation to intercompany payments is misleading” because money “reported as dividends between 2017 and 2022 was used to pay of debt and interest on debt, head office costs and group pension deficit costs’.
“We would like to clarify that the only dividend that shareholders have received between 2017 and 2022 is the payment of £91.8m in 2022,” it said. “Our corporate structure ensures that we can fund significant levels of investment at the most competitive rates, ultimately keeping customer bills lower.”
Adding to the complexity, internal dividends are often only included in the notes to the statements, while dividends can also be deferred until the financial results are published, allowing companies to show zero dividends for the current year in their published annual accounts and reports. Dividend payments are also often described as ‘cash neutral’ as funds are immediately returned to the group company when debts are paid.
In one example, Northumbrian Water, the majority owner of CK Infrastructure Holdings, declared £272.6m in dividends in the year ending March 2022, including an interim dividend of £58.2m and a final dividend of £55.4m. The final dividend was approved after the balance sheet date and will only be shown as a dividend paid in the 2023 financial statements.
The £272.6m includes £159m as a special dividend, which the company said enabled a group company to repay a loan, saying the transaction was “cash neutral” [implying no cash leaves the business]according to the accounts.
“This undesignated dividend is unrelated to the regulated water and sewage business,” Northumbrian said, arguing that it came from a separate entity that provides water treatment for fishing and industrial waters.
Nick Hood, senior adviser at Opus Restructuring, said it was “difficult to see what purpose such opaque corporate structures serve, other than to create a lack of transparency, perhaps facilitate tax minimization and make it unduly difficult to track where money is diverted from the front line continues to invest in water infrastructure.”
However, Thames Water said: “We comply with all tax legislation at all times, both in letter and spirit of the law.” Thames has “a strict performance-linked dividend policy monitored by Ofwat”, he added.
Anglian Water said “Anglian Water Services Ltd, the regulated company, is tax registered in the UK and we pay all our taxes in full”. It added that its “financial structure, payments and policies are detailed in our annual reports”. The Northumbrian declined to comment on the tax allegations and Hall and Helm’s comments.
Water UK, the trade body, said: “All water companies report financial information, including dividend payments, in accordance with international accounting standards.”
“When dividend payments made by a regulated water company are retained within the wider corporate group, the cash is typically used to pay a wide range of corporate overheads, resulting in outside investors receiving a smaller dividend or they receive no dividend at all.’