Ofwat has today published a discussion paper setting out options to strengthen water companies' financial resilience.

Launching the consultation on the options, Ofwat commented:

“Although the sector as a whole remains strongly investible, Ofwat is concerned that some companies have put risky financing arrangements in place and are not linking dividend decisions to performance for customers and the environment.”

The consultation paper points out that concerns arise where companies maintain high levels of debt, weak levels of financial resilience and credit ratings with little headroom in the investment grade, saying:

“These circumstances can be the result of past financing choices, including where large amounts of debt have been raised or there has been a past withdrawal of equity, sometimes accompanied by dividend payments that do not reflect the levels of service delivered to customers.”

The options, which include raising the minimum standards of credit quality, strengthening expectations on dividend payments being linked to performance for customers, and increasing transparency, follow on from Ofwat’s recent 2021 Monitoring Financial Resilience report, which raised concerns about the financial resilience of some companies in the sector.

The resilience report draws attention to the fact that nine companies have gearing levels more than ten percentage points above the level of 60% used in the regulator’s PR19 determinations and two of these maintained gearing levels that exceeded 80%.

The options set out in the new discussion paper are designed to require companies to have robust finances and to better protect customers and the environment from the adverse consequences of financial risks taken by water companies. The options also push companies to link their financial decisions to their performance.

Although the sector as a whole remains strongly investible, Ofwat is concerned that some companies have put risky financing arrangements in place and are not linking dividend decisions to performance for customers and the environment.

The discussion paper states:

“We continue to find instances where companies explain their dividend decisions on the basis of holding companies' obligations to meet debt interest payments rather than by reference to the performance of the regulated company.”

Ofwat interim Chief Executive, David Black, said:

“Water companies need to be financially resilient and transparent about their financial structures. We have concerns on both fronts that need addressing. They need to be financially secure enough to make the investment needed in the essential service they provide, maintain critical assets, and protect the environment. Without that, customers and the environment will lose out.

"Dividends should be linked to performance, and companies have to improve this if they want to rebuild the trust of their customers."

Using Southern Water as a case study, the new consultation paper says the case study illustrates that “weak levels of financial resilience accompanied by poor operational performance, can have real consequences for customers if a company does not have the financial flexibility to turn poor operational performance around.” This could lead customers and the environment to suffer the consequences of poor service for extended periods of time.

Alongside the discussion paper, the regulator has separately published an independent report prepared for Ofwat by Professor Robin Mason and Professor Stephen Wright on financial resilience, gearing and price controls.

Deadline to submit comments on the emerging thinking in the paper, which can be emailed to This e-mail address is being protected from spambots. You need JavaScript enabled to view it , is 31 January 2022  

Click here to download Financial resilience in the water sector: a discussion paper

Click here to download Mason & Wright: A report on financial resilience, gearing and price controls