Thames Water crisis: Which other suppliers are struggling?

Industry regulator Ofwat has flagged five water companies it is most worried about in terms of their financial resilience.

Fears over the financial health of Thames Water has brought other suppliers into the eye of the storm over their debt mountains (Rui Vieira/PA) (PA Archive)

Fears over the financial health of Thames Water have brought other suppliers into the eye of the storm over their debt mountains.

In December, industry regulator Ofwat flagged five water suppliers whose financial resilience it was most worried about.

As well as Thames Water, it highlighted Portsmouth Water, Yorkshire Water, Southern Water and SES Water as its “highest priority for engagement”.

Scrutiny of the industry intensified this week after reports that ministers are working on a contingency plan to prevent debt-laden Thames Water from going under.

The company is battling to finance the £14 billion of debt on its books following interest rate rises.

Debt has been growing across the sector, largely because of high inflation on index-linked debt – meaning companies owe more money when economic conditions worsen.

Yorkshire Water, which supplies more than five million households in the region, racked up a net debt pile of £5.6 billion in its latest financial year.

Its gearing level, which is a measure of a company’s financial risk, stood at 72% – higher than the average of 68.5%. A higher level indicates a higher proportion of debt compared with its equity.

Thames Water’s gearing level was more than 80% last year.

Yorkshire Water admitted that its performance standards have fallen short in areas like sewer flooding and unplanned outages, and said it needs to do more to control its cost base.

Ofwat said in its December report that it had been working with the supplier to improve its financial resilience, including by reducing its gearing level and undertaking a financial structure review.

Southern Water, which provides wastewater services for regions in Kent, Sussex, Hampshire and the Isle of Wight, and supplies water to 2.6 million homes, had a similar net debt pile of £5.2 billion last year.

In April, the group published a turnaround plan to “rapidly improve performance” before 2025, while it also received a £530 million cash injection to support its financial position.

Smaller supplier Portsmouth Water had a gearing level of 73%, while SES Water’s stood at 72% last year.

Furthermore, some of the firms have low credit ratings, meaning they are considered more at risk of not being able to pay off debt.

It’s no wonder waves of worry are now surrounding more firms who have been caught uptide, as the era of cheap money has been dammed and their debt payments have hurtled upwards

Susannah Streeter, Hargreaves Lansdown

Susannah Streeter, head of money and markets for Hargreaves Lansdown, said: “Big questions are now being raised about the potential precariousness of other water firms.

“Ofwat had been monitoring Southern Water and Yorkshire Water, as well as Thames Water, given its concerns over their financial resilience.

“In its 2022 annual report, it also flagged worries about Northumbrian Water and Portsmouth Water for having fallen far short of expectations when it came to the level of dividends paid given their relative financial resilience.

“It’s no wonder waves of worry are now surrounding more firms who have been caught uptide, as the era of cheap money has been dammed and their debt payments have hurtled upwards.”

Yorkshire Water said: “We understand the importance of continuing to have robust financial structures in place and we’ve listened to Ofwat’s concerns and taken action.

“The repayment of intercompany loans is a prudent measure to continue our resilience into the future.

“We agreed with Ofwat that the loans, totalling circa £940 million, will be repaid before the end of March 2027 and with capital injections from our shareholders we’ve been able to repay a substantial amount already.

“This is funding significant improvements in Yorkshire’s rivers and coastlines which we know is something our customers really care about.

“Alongside this, we’ve been significantly improving our financial position over the last six months with a stronger and more resilient balance sheet.”