Recommendation 22

Companies have taken large dividends in the past – in 2005 and 2018 a company paid a dividend of more than 100% of the equity in the company, and in 9 other cases in the last 34 years companies have paid dividends of more than 60% of the equity in the company.65 Ofwat told us that high dividends have resulted in weak financial resilience in companies, and that those dividends have often been funded by financing decisions and do not reflect operational performance.66 Companies have taken on high levels of debt, with the sector average at 70% of the value of the company – above the 55% Ofwat expects.67 The regulators could not prevent this happening in the past. The Consumer Council for Water told us that this leads to an increase in risk. We noted that that high levels of debt are due to poor financial management, not borrowing to invest.68 Likewise we noted that complex company structures can affect the regulated company – such as Kemble’s performance affecting Thames Water.69 Ofwat has visibility of these wider corporate structures, but does not have powers over those entities.70 This needs to urgently change. Ofwat told us that it ring-fences the regulated business to protect customers. Ofwat told us it has increased 60 Qq 5, 19; C&AG’s Report, para 3.7 61 C&AG’s Report, para 3.22 62 Qq 34, 68-69 63 Q 5 64 Qq 32-33 65 Qq 78-79; C&AG’s Report, para 1.22 and Figure 7 66 Qq 67-69 67 C&AG’s Report, para 3.4-3.5 68 Qq 5, 109 69 Qq 14, 34 70 C&AG’s Report, para 3.26 16 its powers to prevent money leaving companies.71 But in 2018 and in 2024 the whole sector’s credit-worthiness was downgraded, in part due to decreased regulatory predictability.72