Ofwat confirms dividend and financial resilience clamp down

Ofwat has pressed ahead with a suite of changes to water company licences tightening controls on dividends and financial resilience.

Licence amendments, consulted on in July 2022

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’). A new three-month grace period has been introduced.

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 regulatory agreement to an alternative arrangement.

Require companies to notify it 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.

Ofwat said the amendments 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.

Defra backed the changes, which were made possible by the Environment Act.

Moody’s said on balance the licence changes were credit positive for the operating companies – albeit “the credit benefit may be slow to materialise” – but negative for holding companies.