UK water company dividends jump to £1.4bn despite criticism over sewage outflows

Britain’s privatised water and sewage companies paid £1.4bn in dividends in 2022, up from £540mn the previous year, despite rising household bills and a wave of public criticism over sewage outflows.

The figures, based on a Financial Times analysis of the 10 largest water and sewage companies’ accounts, are higher than headline dividends in the year to end March 2022. This is because several have layered corporate structures with numerous subsidiaries, only one of which — the operating company — is regulated by Ofwat.

Maintaining dividends means less money is available from customer bills for investment in critical infrastructure such as sewage treatment and water mains.

The complex arrangements enable providers to distinguish between internal dividends — payments between intermediate holding companies in the group — and external dividends to private equity, sovereign wealth and pension funds, which own the entire water and sewage business including the holding companies.

The byzantine structures are one reason Ofwat is concerned over transparency in the sector. It is updating licence conditions so it can block dividends from April 2025 if the company looks financially vulnerable. It will also require boards to take account of environmental and customer targets when they decide to make payments.

Although water monopolies argue internal dividends are used to service debt and other costs, Ofwat says it “doesn’t recognise the distinction” and will consider all dividends that leave the regulated company “regardless of how they are used by the group and whether any amounts are paid out to the ultimate shareholders.”

David Hall, visiting professor at Greenwich University, said the monopolies “call them dividends because they are dividends”.

Dividends “are paid for by households and businesses through their bills, and [ . . . ] benefit group companies wholly owned by the ultimate shareholders.”

Thames Water, the largest water monopoly, paid £37mn of “internal dividends” to its parent company in the year to March 31 2022. This was an increase from £33mn in the previous 12 months, despite announcing that “external shareholders” had not received dividends for five years.

The company, whose owners include China Investment Corporation, said all dividends would be used to “service debt obligations and group related costs of other companies within the wider Kemble Water group [which includes Thames Water]”.

Thames Water’s owners
Who How much What they do When
Ontario Municipal Employees Retirement System 31.8% One of Canada’s largest pension plans, with C$105 billion of net assets and
global experience managing essential infrastructure
Universities Superannuation Scheme 19.7% A UK pension scheme for the academic staff of UK universities 2017, 2021
Infinity Investments SA 9.9% A subsidiary of the Abu Dhabi Investment Authority and one of the world’s
largest sovereign wealth funds
British Columbia Investment Management Corporation 8.7% An investment management services provider for British Columbia’s public
Hermes GPE 8.7% One of Europe’s leading independent specialists in global private markets
and manager of the BT Pension Scheme (BTPS), one of the largest UK pension
schemes for the private sector
China Investment Corporation 8.7% One of the world’s largest sovereign wealth funds 2012
Queensland Investment Corporation 5.4% A global diversified alternative investment firm and one of the largest
institutional investment managers in Australia
Aquila GP Inc. 5.0% A leading infrastructure management firm and a wholly owned subsidiary of
Fiera Infrastructure Inc., a leading investor across all subsectors of the
infrastructure asset class
Stichting Pensioenfonds Zorg en Welzijn 2.2% A pension fund service provider managing several different pension funds as
well as affiliated employers and their employees

After being sold with no debt at privatisation three decades ago, the companies have racked up borrowings of £60.6bn, according to Ofwat.

At the same time total spending on waste water infrastructure by the 10 largest companies — excluding Thames Tideway — has failed to rise significantly. Average annual wastewater investment was £295mn in the 1990s, £297mn in the 2010s and £273mn in the 2020s so far.

Now costs — including interest payments — are soaring, adding to pressure on company finances just as they face demands to ramp up investment in infrastructure.

It is hard to trace exactly where the cash from water bills is going, says Sir Dieter Helm, professor of economic policy at Oxford university.

“These complex financial structures are not transparent or clear and have delivered no obvious benefits to customers,” he says. “Water companies have been running rings around Ofwat for years.”

Ofwat said its new powers would enable it to take action if companies pay dividends that did not reflect performance, while Anglian Water said it “fundamentally disagreed” that any transactions are opaque. Thames Water said it “has a strict, performance-linked dividend policy monitored by Ofwat”.

The “idea that money is diverted from frontline infrastructure development is simply untrue”, Anglian added. “The regulator specifies the level of infrastructure development and monitors the outcome.”

By any definition, however, dividends remain high. Anglian Water’s accounts showed it proposed a £169mn dividend to its immediate parent company last year, although it says just £91.8mn will go to the ultimate shareholders.

“This marked a return to paying a dividend for the first time since 2017,” Anglian said. However, the accounts show £2.5bn has been paid in “internal” dividends over the past five years.

Anglian Water, owned by a clutch of pension funds and the Abu Dhabi Investment Authority, said the word “dividend in terms of the inter company payments was misleading” as money “reported as dividends between 2017 and 2022 was used to pay debt and debt interest, head office costs and group pension deficit costs”. 

“We’d like to be clear the only dividend payment that shareholders received between 2017 and 2022 was the payment of £91.8mn in 2022,” it said. The “corporate structure ensures we can finance substantial levels of investment at the most competitive rates, ultimately keeping bills lower for customers.”

Anglian Water’s owners
Who How much What they do Origin
CPP Investments 32.9% A professional investment management organisation that manages the fund in the best interest of the more than 20mn contributors and beneficiaries of the Canada Pension Plan Canada
IFM Global Infrastructure fund 19.8% A fund advised by IFM Investors, which is a global institutional fund manager owned by 19 profit-to-member Australian pension funds. They specialise in infrastructure, private equity, debt and equity investments Australia
Infinity Investments 16.7% Belongs to a group of entities ultimately wholly owned by the Abu Dhabi Investment Authority and focuses on infrastructure investments in Europe Luxembourg
Igneo 15.6% An unlisted infrastructure asset management business and is part of the First Sentier Investors Group (FSIG), a global asset management business, FSIG has $174bn of assets under management (March 2022) on behalf of institutional investors, pension funds, wholesale distributors, investment platforms, financial advisers and their clients worldwide. Australia
Camulodunum Investments 15.0% A joint investment vehicle for Dalmore Capital and GLIL Infrastructure. GLIL Infrastructure is run by the pension funds of Greater Manchester, Merseyside, West Yorkshire and Local Pension Partnership Investments. Dalmore has more than 1.3mn pension holders invested directly in AWG Australia

Adding to the complexity, internal dividends are often only included in notes to the accounts, while dividends can also be deferred until after financial results are released, enabling companies to show zero dividends for the current year in their published annual reports and accounts. Dividend payments are also often described as “cash neutral” as the funds are immediately returned to the company from within the group in payment of debts.

In one example, Northumbrian Water, majority owned by CK Infrastructure Holdings, declared £272.6mn in dividends in the year ended March 2022, including an interim dividend of £58.2mn, and a final dividend of £55.4mn. The final dividend was approved after the balance sheet date and will only show as a paid dividend in the 2023 financial statements.

The £272.6mn included £159mn as a special dividend, which the company said enabled a group company to pay off a loan, stating that the transaction was “cash neutral” [implying no cash leaves the business], according to the accounts.

“This non-appointed dividend was not related to the regulated water and sewage business,” Northumbrian said, arguing it came from a separate entity that provides fishing and industrial water treatment.

Nick Hood, senior adviser at Opus Restructuring, said it was “difficult to see what purpose such opaque corporate structures serve except to create a lack of transparency, perhaps to facilitate tax minimisation and to make it unduly difficult to trace where money diverted from front line water infrastructure investment is going.”

However, Thames Water said: “We comply with all tax legislation at all times, both within the letter and spirit of the law.” Thames has a “strict, performance-linked dividend policy monitored by Ofwat,” it added.

Anglian Water said “Anglian Water Services Ltd, the regulated company, is registered for tax in the UK, and we pay all of our taxes in full”. It added that its “financial structure, payments and policies are set out in detail in our annual accounts”. Northumbrian declined to comment on the tax allegations and the comments by Hall and Helm.

Water UK, the trade body, said: “All water companies report financial information, including dividend payments, in line with international accounting standards.”

“When dividend payments made by a regulated water company are retained within the broader corporate group the money is typically used to pay a wide range of corporate overheads, with external investors receiving a smaller dividend, or no dividend at all, as a result.”