Ofwat moves to block dividends to ensure financial resilience

The water regulator has proposed strengthening its powers to block dividend payments, among other measures, if a company’s financial resilience is not secure.

Ofwat’s plan includes extending its powers to take enforcement action against companies that fail to link dividend payments to performance or provide transparency over payments.

The plan follows measures by Ofwat in recent years that included blocking intercompany loans and limiting how much shareholders can be paid in certain circumstances. The regulator said the latest suggestions, which are under consultation until end of September, are intended to strengthen companies’ resilience as well as improve the attractiveness of investment into the sector to help ensure essential infrastructure can be funded in the coming decades.

Ofwat expressed concerns that some companies have been “slow to acknowledge” they need to improve their financial position or have been “unwilling to engage openly”.

The report said Ofwat’s experiences indicated that backstop financial resilience protections across the sector need strengthening.

Companies must demonstrate how dividend payments are linked to performance for both customers and the environment as well as to the organisation’s financial resilience. Ofwat will, under the proposals, have the power to intervene if a company falls short.

David Black, Ofwat chief executive, said: “It is vital that companies have sufficient financial strength to withstand shocks and surprises. Our proposals today will raise the bar on credit quality and give us new powers to block dividends if a company is putting their financial stability at risk in making them. These changes should also ensure that companies engage with us earlier when they do see any concerns with their financial resilience.

“In addition, our proposals will reinforce the link between performance and dividends. Customers are rightly concerned that companies pay out dividends even where the fall well short of their obligations to customers and the environment. The responsibility for determining dividends ultimately sits with companies and their boards. However, in a sector that provides an essential service, where customers cannot choose their supplier, it is important that customers and wider stakeholders can understand and have confidence in how decisions companies make about dividends relate to overall performance.”

In the consultation document, Ofwat expressed concerns the resilience of some companies was inadequate, but that it lacked regulatory protections to sufficiently protect the interests of customers. It highlighted that weakened financial positions can lead to reduced levels of operational performance and erode a company’s capacity to deal with shocks or financial pressures without compromising on services.

Ofwat wants to see dividend policies and payments clearly linked to the service delivered to customers and the environment, something it found was lacking in its 2020-21 monitoring financial resilience report, with some companies failing to demonstrate clearly enough how performance and dividends connect.

It is seeking to modify licence conditions as follows:

• To raise the cash lock-up trigger to BBB/Baa2 with negative outlook from April 2025 to ensure companies have sufficient headroom within investment grade credit. Companies would be prevented from paying dividends if they would risk further damaging resilience. As with current licence conditions, Ofwat said companies could request to make payments even when they are in lock up.
• To require companies to hold two issuer credit ratings, which would stop companies holding a rating that is significantly higher than others available.
• For companies to notify Ofwat of any change to their credit rating
• To bring other ring-fencing provisions in Wessex’s licence up to the current industry standard that was introduced last summer.