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UK watchdog sends fresh warning to water utilities over dividends

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The UK’s water regulator has lashed out at the country’s water utilities for paying “significant dividends” to shareholders while failing to fix their poor environmental record, in comments that pile more pressure on the industry battling with high debt and pollution incidents.

In a letter to the utilities’ chairs seen by the Financial Times, Ofwat boss Iain Coucher said the number of serious pollution incidents was “still too high” and “the pace of reduction not fast enough”. 

“Some companies are still paying significant dividends while failing to meet their environmental targets, having unacceptable combined sewer overflow spills and being subject to ongoing legal cases,” Coucher wrote in the letter dated March 25.

Ofwat confirmed the letter and said: “This sets out our expectations on water companies’ obligations to adhere to our dividend policy licence condition. We will take action against companies that fail to meet the licence condition.”

The criticism comes as payouts by water companies have become a politically controversial issue amid public outcry over sewage pollution into coastal waters, rivers and lakes.

The warning also suggests that Ofwat is unlikely to adopt a sympathetic approach to Thames Water’s owners as the UK’s largest water company teeters on the brink of financial collapse.

Water companies in England and Wales paid £2.5bn in dividends in the two financial years since 2021, while adding more than £8bn in debt, according to an FT analysis published this week.

The figures show that the 16 water monopolies have paid out a total of £78bn in dividends in the 32 years between their privatisation in 1991 and March 2023. The companies, which were privatised with no debt on their balance sheet, have amassed £64bn in borrowings over the past three decades.

Meanwhile, the Environment Agency is conducting a far-reaching criminal investigation into suspected widespread non-compliance by water and sewerage companies at more than 2,200 sewage treatment works. Ofwat is running its own probe into the matter. There are also class-action claims brought by campaign groups.

In the letter, Coucher warned that the number of “criminal convictions” faced by water companies was too high. He said that even though convictions “lag the financial year in question”, they still needed to be considered when boards were deciding on dividends and that the basis of the decision needed to be explained.

Thames Water’s shareholders, including pension funds Omers and USS as well as the Chinese and Abu Dhabi sovereign wealth funds, last month said that conditions imposed by Ofwat had made the company “uninvestable”, threatening to walk away. They had requested leniency on dividend rules and regulatory fines, as well as a 56 per cent increase to bills.

That has left the company rushing to raise more than £3bn in fresh capital by 2030, including £750mn by next year, to keep services running and improve its water and sewage infrastructure. Thames Water supplies a quarter of the population in England and Wales — or 16mn people.

The government has drawn up contingency plans for Thames Water dubbed Project Timber under which the business would be nationalised and split in two, with its debts expected to go on the public balance sheet, depending on a decision by the Office for National Statistics.

Some bondholders could lose up to 40 per cent of their money under the plans in the government’s central scenario although others could incur a loss of about 5 per cent.

In the letter Coucher acknowledged that dividends were an “important element of returns to investors”, which was “why we provide for a base level of dividend”.

It is a “sensitive” subject “particularly as water companies need to raise significant levels of new equity and debt to support the ramp-up in investment planned”, he said.

Ofwat has yet to decide whether Thames Water breached rules in paying a £37.5mn dividend to shareholders last October. A ruling, originally expected in March, will be closely watched by investors and lenders as any fine would eat into the £2.4bn of cash the company has to run its operations. The company says it has enough cash to last for another 15 months or until July next year.

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