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 £14billion 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 £5.6billion 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 had fallen short in areas like sewer flooding and unplanned outages, and said it needed 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 2.6million homes, had a similar net debt pile of £5.2billion last year. In April, the group published a turnaround plan to "rapidly improve performance" before 2025, while it also received a £530million 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.
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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."
