The water regulator for England and Wales has raised a red flag over the financial health of companies supplying more than 20 million customers in the south-east of England, amid growing public anger over the industry’s record on services and pollution.
Ofwat’s latest report on the financial resilience of the sector again named Thames Water, Southern Water and SES (Sutton and East Surrey) Water as companies that need to take action to shore up their long-term finances.
The regulator also raised concerns over the financial health of South East Water, which has 2.2 million customers, adding it to its “requires action” category for companies that have the lowest scores for financial resilience in the industry.
The regulator warned that if the four companies do not improve their financial health within the next two years it could bar them from paying dividends to their investors.
Ofwat said it had moved South East Water into its “requires action” category to reflect the “increased financial pressures, which sit alongside a weakening in operational performance”.
Earlier this year it emerged that South East has spent more on dividends and servicing its debt pile over the past two years than investing in infrastructure. It spent £232m on distributing dividends and paying interest on its debts in the two years to March 2022, according to a research by the University of Greenwich, compared with investments of £179.8m in upgrading infrastructure – from replacing pipes to improving water supplies.
The company, which serves customers in Kent, Sussex, Berkshire and Surrey, came under fire over the summer when 6,000 households were left without running water for up to a week. It implemented a hosepipe ban and blamed increased working from home for growing demand.
Southern Water and Thames have remained on Ofwat’s financial watchlist despite receiving significant investment in recent years. Southern has been handed £905m of equity investment since September 2021, and Thames Water has received £500m with shareholder agreement for further equity support. Ofwat said both would remain under scrutiny as they delivered their turnaround plans.
England’s water companies must prove to the regulator that they can shore up their balance sheets and improve their customer service after the sector received a total of almost £4.6bn from shareholders since 2020.
The industry has been dogged by criticism from consumer groups that customer service is falling amid repeated leaks and sewage spills, while companies continue to pay their shareholders attractive dividends.
The Consumer Council for Water (CCW) warned earlier this month that customers at Southern and Thames were being let down by “a failure to understand and deal with the causes of high levels of complaints from their customers”. Complaints received by Southern Water were almost three times higher than the overall average for waste and sewerage companies. Complaints received by Thames Water were just over one-and-a-half times higher than the average
David Black, the regulator’s chief executive, said: “We expect companies to maintain a level of financial headroom so they can manage periods of volatility and meet their obligations to customers and the environment.”
He added: “Where we have seen cause for concern, we have also seen some companies responding to the challenge, and we expect them to continue to work on improving their financial resilience.
“This is particularly notable in the cases of Yorkshire Water and Portsmouth Water, which last year we had categorised as requiring action. They have taken clear actions and this year have been moved out of our bottom category. We expect to see more companies following this trend and will continue to closely monitor their progress.”
