Ofwat announces new powers on water company dividends

20 Mar 2023 03:17 PM

Ofwat yesterday announced new powers that will enable it to stop the payment of dividends if they would risk the company’s financial resilience, and take enforcement action against water companies that don’t link dividend payments to performance.

The change will require company boards to take account of their performance – for customers and the environment – when deciding whether to make dividend payments. It will also require companies to maintain a higher level of overall financial health.

These changes to company licences reduce the risks that a company’s poor financial health may pose to customer interests and its ability to invest to protect the environment. If the company falls short, Ofwat will be able to step in and take enforcement action.

By incentivising companies to strengthen their financial health, Ofwat will also improve the attractiveness of investing in water and wastewater companies. This, in turn, helps ensure the sector can continue to focus on the investment and performance improvements needed to protect customers and the health of our waterways.

As such, the regulator is modifying water company licences to:

• Require companies to take account of service delivery for customers and the environment, as well as investment needs and financial resilience, when deciding whether to pay dividends
• Require companies to hold a strong credit rating and to stop them paying dividends if their financial health is at risk
• Improve the transparency and consistency of company licences.

The licence changes are designed to both incentivise those companies experiencing financial health challenges to engage with Ofwat promptly, and to allow Ofwat to intervene and take actions faster, where companies fail to take such steps themselves.

David Black, Ofwat CEO, yesterday said:

“When deciding on dividend payments to investors, water companies need to take stock of their performance for customers, the environment, and the company’s overall financial health. Too often, this has not been the case. That is why we’re implementing changes that will allow us to better hold companies to account and take enforcement action when they get it wrong.

“We hope the introduction of these new powers will focus minds around company board tables on the importance of responsible decision making and openness with customers and other stakeholders. And if that isn’t the case, we will act.”

Notes to Editors

• The decision document sets out the reasons for the decision to modify certain ring-fencing provisions in each water company’s Instrument of Appointment (licence). It follows a July 2022 consultation on modifications to strengthen the ring-fencing licence conditions of the largest undertakers’ and the significant engagement Ofwat has had with water companies and stakeholders since the publication of a discussion paper on this topic in December 2021. The decision relates to Condition P of water company licences.
• The licence amendments are:
  • Require companies to stop paying dividends before their financial resilience leads to a downgrade in their credit rating to the lowest investment grade (the ‘cash lock up’)
  • Require companies to maintain dividend policies and to only declare or pay dividends under those policies that take account of service delivery for customers and the environment over time, current and future investment needs and financial resilience over the long term
  • Require companies to hold two credit ratings from at least two credit rating agencies, or to seek our agreement to an alternative arrangement, if appropriate
  • Require companies to notify us about any changes to credit ratings (including changes in rating and/or outlook, new ratings assigned or planned rating withdrawals), with reasons for the change, where applicable
  • Bring Wessex Water’s licence protections for customers in line with that of all other water companies.
• The decision with respect to English water companies’ licences is made under section 12A of the Water Industry Act 1991 (WIA91) and the decision with respect to Welsh Water companies’ licences is made under section 13 of the WIA91. It follows Ofwat July 2022 consultation which contained the requisite statutory notices of modification and the December 2021 discussion paper on ‘Financial resilience in the water sector’.