Ofwat has set out proposals to give it extra powers to block dividend payments if a company’s financial resilience is at risk – that is, how it avoids, copes with and recovers from disruption, such as extreme weather or global events.

It is also proposing to take enforcement action against water companies that don’t link dividend payments to performance, or fail to be transparent about their pay-outs.

The regulator said inadequate financial resilience puts customer money at risk and “undermines focus on customers and the environment”.

David Black, chief executive of Ofwat, said: “Customers are rightly concerned that companies pay out dividends even where they 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.”

As part of the proposals, companies will be required to transparently demonstrate how dividends take account of service delivery for customers and the environment, investment needs, and the company’s own financial resilience. If the company falls short, Ofwat will be able to step in and take action.

It can currently fine companies up to 10% of their annual turnover as part of enforcement powers.

‘Raise the bar for credit quality’

It is also seeking to raise the cash lock-up trigger to BBB/Baa2 with negative outlook. When a company falls to a lower credit rating (the trigger point), the company would need permission from Ofwat to pay any dividends to investors. The change would be effective from 1 April 2025.

Ofwat also wants to see companies hold two issuer credit ratings, with the cash lock-up trigger being met if only one of these ratings hits the required level. This would remove the ability for companies to hold one issuer rating that is significantly higher than the others available.

Further, the proposals would require companies to notify Ofwat of any change to their credit rating. Currently this is only required for “material changes”.

Elsewhere, it wants to bring other ring-fencing provisions in Wessex Water’s licence up to the current industry standard.

Black added: “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.”

One in 10 have unaffordable water bills

Steve Hobbs, senior policy manager at the Consumer Council for Water (CCW), said: “We support Ofwat’s moves to strengthen the financial resilience of the water industry to help protect customers, especially in uncertain economic times. Companies’ executive pay and dividends should always reflect evidence of them delivering for customers and the environment and these steps by the regulator will help to ensure that is the case.”

“As the cost of living crisis deepens, we’re keen to work with Ofwat to encourage companies that outperform financially to reinvest some of that money into boosting support for the one in ten households that tell us their water bill is unaffordable.”

According to the Link Group UK’s dividend monitor, since 2010, Pennon Group has paid out over £3bn, while Severn Trent has issued £2.6bn. Meanwhile United Utilities has paid out £3.1bn.

The consultation runs until 29 September 2022.