Privatized UK water and sewage companies paid £1.4bn of dividends in 2022, up from £540m a year earlier, despite rising household bills and a surge in public criticism of wastewater outflows.
The figures, based on a Financial Times analysis of the accounts of the 10 largest water and sanitation companies, are higher than headline dividends in the year to the end of March 2022. That’s because many have layered corporate structures with numerous subsidiaries, just one of which – the operating company – is regulated by Ofwat.
Keeping dividends means less money is available from customer invoices to critical infrastructure investments such as wastewater treatment and water mains.
The complex arrangements allow 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 about transparency in the industry. It’s updating licensing terms so it can lock in dividends from April 2025 if the company looks financially vulnerable. It will also require boards of directors to take this into account environmental and customers’ goals when deciding to make payments.
Although water monopolies argue that domestic dividends are used for servicing debt and other costs, Ofwat says it “doesn’t recognize the distinction” and will consider all dividends that go out of the regulated company “regardless of how they are used.” by the group and whether any amounts are paid to the ultimate shareholders.
David Hall, a visiting professor at Greenwich University, said that monopolies “we call them dividends because they are dividends.”
Dividends “are paid by households and businesses through utility bills, e [ . . . ] benefit the companies of the group wholly owned by the last shareholders”.
Thames Water, the largest water monopoly, paid £37m of “internal dividends” to its parent company in the year to 31 March 2022. This is an increase from £33m in the previous 12 months, despite the announcement that “outside shareholders” had received no dividends for five years.
The company, whose owners include China Investment Corporation, said all dividends would be used to “pay off debt obligations and costs related to the group of other companies within the larger Kemble Water group.” [which includes Thames Water]”.
After being sold with no debt to privatization three decades ago, companies amassed £60.6bn in loans, according to Ofwat.
At the same time, total spending on wastewater infrastructure by the 10 largest companies, excluding Thames Tideway, has not increased significantly. Average annual investment in wastewater has been £295 million in the 1990s, £297 million in 2010 and £273 million in the 2020s so far.
Now costs, including interest payments, are soaring, increasing pressure on corporate financeeven as they face demands to increase investment in infrastructure.
It’s hard to track exactly where the money from water bills goes, says Sir Dieter Helm, a professor of economic policy at the University of Oxford.
“These complex financial structures are not transparent or clear-cut and have not delivered clear benefits to customers,” he says. “Water companies have been running loops around Ofwat for years.”
Ofwat said its new powers would allow it to take action if companies pay dividends that don’t reflect performance, while Anglian Water said it “fundamentally disagrees” that any deal is opaque. Thames Water said it “has a strict and performance-linked dividend policy monitored by Ofwat”.
“The idea that money is being siphoned off from frontline infrastructure development is simply false,” Anglian added. “The regulator specifies the level of infrastructure development and monitors the result.”
By definition, however, dividends remain high. Anglian Water’s accounts showed it proposed a £169m dividend to its parent company last year, although it says only £91.8m will go to ultimate shareholders.
“This marked a return to paying a dividend for the first time since 2017,” Anglian said. However, accounts show that £2.5bn in “domestic” dividends have been paid out over the past five years.
Anglian Water, owned by a group of pension funds and the Abu Dhabi Investment Authority, said the word “dividend in terms of intercompany payments was misleading” as the money “reported as dividends between 2017 and 2022 was used to pay debt and debt interest, headquarters costs and group pension deficit costs.
“We would like to be clear that the only dividend payment shareholders received between 2017 and 2022 was the £91.8 million payment in 2022,” he said. The “company structure ensures that we can finance substantial levels of investment at the most competitive rates, ultimately keeping bills lower for clients.”
Adding to the complexity, internal dividends are often only included in the notes to the accounts, while dividends can also be deferred until after the financial results are released, allowing companies to show zero dividends for the current year in their reports and published annual accounts. Dividend payments are also often described as “cash neutral” in that funds are immediately returned to the company from within the group as payment of debts.
In one example, Northumbrian Water, majority owned by CK Infrastructure Holdings, declared dividends of £272.6m 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 appear as a paid dividend in the 2023 balance sheet.
The £272.6m included £159m as a special dividend, which the company said enabled a group company to pay off a loan, it said the transaction was ‘cash neutral’ [implying no cash leaves the business]according to accounts.
“This unnamed dividend was unrelated to the regulated water and wastewater business,” Northumbrian said, arguing it came from a separate entity that supplies fisheries and industrial water treatment.
Nick Hood, senior consultant at Opus Restructuring, said it was “hard to see what purpose such opaque corporate structures serve other than to create a lack of transparency, perhaps to facilitate tax minimization and make it excessively difficult to trace where the money has been.” diverted from the front line investments in water infrastructure are going”.
However, Thames Water said: “We always comply with all tax regulations, both in the letter and in the spirit of the law.” Thames has a “strict and performance-linked dividend policy monitored by Ofwat,” he added.
Anglian Water said “Anglian Water Services Ltd, the regulated company, is registered for tax purposes 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 accounts”. 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 line with international accounting standards.”
“When dividend payments made by a regulated water company are kept within the larger corporate group, the money is typically used to pay a wide range of corporate overheads, with outside investors receiving less or no dividend.” dividing, accordingly.”
—————————————————-
Source link