Dividends of £2.5bn paid by water companies in the last two years, as debts rise to £8.2bn

In the two years following 2021, water companies in England & Wales have paid £2.5bn as dividends to shareholders and added £8.2bn net debt.

According to the updated numbers, the 16 water monopolies paid out a combined total of £78bn as dividends between 1991 and March 2023. The research is based upon regulatory data, then adjusted for inflation.

The £78bn payment is less than half of the £190bn that the companies have spent on infrastructure over the same period. The utilities, on the other hand, accrued more than £64bn in net debt during this period despite having been sold through privatisation and without borrowings.

It comes amid concerns that the financial crisis of the UK’s biggest water utility, Thames Water may spread to other companies. The parent company of the water utility defaulted earlier this month on its debt after investors balked when they were forced to invest more money in the utility.

The debt-ridden water companies of the world are also struggling with historically high construction, energy, and labor prices. In the meantime, there has been a public and political outcry over pollution and service quality.

Investors in water companies said that Thames Water was a “canary in the coal mine”. We are all keeping an eye on the largest water company, which is in danger of going under. Investors are all talking about it.”

Ofwat is closely monitoring the financial stability of South East Water (SES Water), Southern Water (Southern Water) and SES Water. Southern Waterwas saved from bankruptcy by an Ofwat-brokered agreement with Australian infrastructure manager Macquarie. However, the utility has been forced to suspend its external dividends for at least another five years following a downgrade in credit ratings last year.

Ofwat has been pushing investors to invest more money in the utilities. Investors, including sovereign wealth funds and private equity firms as well as pension funds, are not certain if they will be willing to play ball. Since privatisation, few equity injections were made.

Thames Water received £500mn from Kemble parent company inof an 8 percent interest loan.

Adam Leaver is a professor of accounting at Sheffield University. They invested in a business they believed would borrow money. They didn’t expect to have their own cash. “Now the companies are in debt, have not invested enough into infrastructure, and some of their more recent investors are screwed.”

Ofwat is trying to reduce the debt of utilities. It wants them to lower gearing, a measure for debt to assets from an average sector of around 68% to 55% by April 2025.

Peter Hope, head regulatory finance at Oxera Consulting said that water companies would need to make changes in their financial management in the coming years due to the expected investment. “In general, the industry must go from not being able to retain any earnings since privatisation to having to keep almost all the earnings for the next twenty-five years.”

According to his calculations, based on a gearing ratio of 55 percent assumed by Ofwat, they will also have to inject £5bn into equity in 2030 and £8bn over the next five years. He added that this doesn’t take into consideration the future need to increase in order to replace old assets, deal with climate change and resilience.

Northumbrian Water (Yorkshire Water), Thames Water (Southern Water) and Southern Water have declined to comment. Dwr Cymru and South East Water declined to comment.

Water UK, the industry’s representative, announced that investors had pledged to invest £6.5bn as new equity and raise debt as part their £96bn plan of investment by 2030. Investors’ willingness is dependent on a good regulatory settlement, the report said.

In the end, customers pay for costs through their bills. Companies have requested that these be increased up to 70% by 2030.

Investors should also be aware of the fact that new rules implemented by Ofwat last March restrain dividend payments if companies are unable to maintain their financial stability or perform poorly on social and environmental metrics.

Dividend restrictions are a barrier to investors whose primary responsibility is to satisfy the shareholders.

Water companies have a tendency to have multiple-layered corporate structures, some of which are there to raise money. Ofwat regulates only the operating company, and all payments made from that are counted as dividends. Investors argue that this is often done to service debt in the other entities instead of directly enhancing shareholders.

Leaver stated: “In the lack of dividends which are often used to pay off the debt at holding companies, financial companies will be insolvent pretty quickly.”

This research is based upon data provided by Ofwat and inflated using the average CPIH for the current financial year to 2023.

The regulator does NOT adjust the dividend figures for this 32-year period to account for inflation. This gives a nominal total of £52bn for the entire period.

Thames Water’s possible temporary renationalisation is a topic of public and political debate.

The 16 companies were all criticised for failing to provide a high level of service, such as dumping undetermined quantities of sewage in waterways, or experiencing frequent water leaks. The Environment Agency has launched its largest criminal investigation to date into possible widespread non-compliance at over 2,200 sewage treatment plants by water and sewerage firms. Ofwat also conducted its own investigation.

Investor from a water company said, “The government is in need of someone who will invest some money.” “But the current environment is not attractive,” said the investor. . . There’s a good chance that you could lose your shirt.”