Two years after the cost of living crisis hit, many English households are still struggling. And while people can – and have – cut back on many things, water is not one of them. What a lot of billpayers may not realise is that their money does not just pay for services, it also services debt, much of which is connected to dividends paid to shareholders. Finding out what proportion of bills goes towards servicing debt is no easy task: there is no widely agreed methodology for this calculation, and the guidelines from Ofwat, the industry regulator, are based on a theoretical company, which experts say is not descriptive of real-life business. These companies – some of them with more than £1bn in yearly revenues – use complicated financial mechanisms that make it even more difficult to unpick. One such device commonly used by some of the companies that supply our water is a derivative – a financial instrument used to mitigate the risks of fluctuations in interest rates and currency value. The effects of such products vary substantially year on year and across companies: in 2023, derivatives worked in English water companies’ favour but in other years derivatives have been associated with high costs, raising the cost of servicing debt up to 36% of revenues across the industry in 2022. The water companies defend their use of derivatives – indeed some argued in response to the Guardian that they protected customers and reduced bills. Experts in the field – including Dr Kate Bayliss from the department of economics at Soas University of London – say derivatives, and instruments like them, “are speculative financial instruments that bring their own risks and additional complexity into what should be a very straightforward and transparent business”. Bayliss said some water companies had previously used “financial engineering” to raise debts and pay out dividends and they were now using derivatives to mitigate fluctuations in financing costs. It is a position shared by Ofwat, which says they can affect financial resilience as well as company credit ratings and may mask underlying financial weakness. The Guardian’s methodology, which compares water companies’ net finance costs to their revenue, was developed with Bayliss and agreed by other experts. To iron out some of the annual fluctuations caused by derivatives, the Guardian, in consultation with these experts, looked at company accounts over a five-year period. The analysis includes the gains and losses from derivatives when these products affect the finance cost of servicing debts. We used the companies’ income statements – not cashflow – as the basis of the methodology, as recommended by independent experts, who said these were more accurate and made for a more meaningful comparison with revenue. Richard Murphy, one of the experts consulted, said: “Cashflow does not indicate a company’s ability to make money or its ability to survive in the long term. So it is a hopeless measure of the ability to meet the long-term demands of the water industry.” Our analysis found customer bills make up at least 96% of water company revenue. Some of the companies that responded to the Guardian’s request for comment – including Thames Water, Southern Water and South East Water – disputed the methodology. According to the analysis, almost a quarter of the revenues of Affinity Water – which operates in London, eastern and south-eastern England – are used, on average, to service debt. The company’s figure, calculated based on its cashflow statements, is 11p in £1. Affinity said: “The 11p is based on cash interest paid as a portion of all expenditure incurred in the year to 100p. Our total expenditure includes amounts spent servicing debt, investment in assets, suppliers operating services, staff costs, and local and central government … The water industry is financed by a combination of debt and equity. This minimises costs to customers.” Similarly, Sutton and East Surrey Water (SES) said the cash interest paid compared with revenue was 9.8% on average over the past three years. However, the Guardian put the five-year figure at 22%. A spokesperson said that despite inflation and supply-chain cost pressures “the business remains financially resilient. We always try to keep our charges as fair as possible for our customers and are also working hard to find savings in the way we operate.” The spokesperson said most of the finance costs in 2023 were the result of the high impact of inflation. “However, this does not result in any cash payment until we repay the debt at the end of the bond term, which runs from 2027 to 2031, and therefore does not have immediate direct impact to our customers.” Wessex Water, which serves parts of the south-west, spent on average 19.1% of revenues on servicing debts, according to the analysis. A spokesperson for the company said its debts were “in line with regulatory requirements and financial covenants and avoiding any risk to our financial stability”. Yorkshire Water was found to have spent 16.2% on average over the past five years paying for interest and other fees associated with having borrowed money. The company said borrowing was only one way of financing its investments “as it ensures we are spreading the costs of investment across the future life of those new assets, and therefore it’s not solely paid for by today’s bill payers”. The analysis found Severn Trent Water spent 11.2% on average in the past five years servicing debts. A spokesperson for the company said the assets in which Severn Trent invested were for providing services now and for future generations. They added: “it is therefore appropriate to match a proportion of our borrowings for the investment made against the life of those assets – similar to how a mortgage is paid. The amount of debt we hold is relative to the size of our asset base, and it is not only one of the lowest in the sector but also in line with the level guided by the regulator for financial resilience.” Similarly, United Utilities’ cost of debt was 11.3%, according to the analysis. The company said it could keep costs to customers as low as possible because of its “robust financing structure”. United Utilities said it had “one of the lowest levels of gearing in the sector, which enables us to raise debt efficiently to support ongoing and future capital investment and continue to spread the cost to customers over the lifetime of the assets.” An Ofwat spokesperson said: “When setting bills, we take great care to ensure that customers’ contribution towards companies’ costs of borrowing is fair. For the 2020-25 period, we used a method that means, should a company choose to go beyond the levels for debt that we use for our calculation, the company bears the additional cost for repaying the money and not the customer.”