Water companies have been struggling with their finances over the last few years, but customers of Southern Water have even more reason to consider switching business water providers, as it has been revealed the firm is facing serious monetary problems.
Why are water companies in financial strife?
One of the main reasons why water providers are at risk of liquidation and, subsequently, want to hike their prices is because they are in a considerable amount of debt.
Thames Water’s financial deficit is most well-known, with a reported £16 billion in debt. This amounts to 80 per cent of the value of the business.
Another reason for their fiscal challenges is the UK’s deteriorating water infrastructure, which means millions of pounds of investment has had to be ploughed into fixing pipes and facilities as the Victorian network is no longer fit for purpose.
When the pipework was built, there were not as many people or not as much demand for water. This increased stress on the pipes, while their deterioration over the years means there are often problems with the system, including burst pipes, water shortages, and overflowing sewage.
Due to water pollution and other issues, water companies have been hit with hefty fines, making it even harder for them to invest in the network and provide for the increasing demand.
It is thought that the UK will need five billion extra litres of water a day by 2050, as a result of growing population, food production demands, and the need to protect the environment against climate change.
At the same time, water companies have been impacted by rising interest rates, which means the amount they have to pay on their debt makes it impossible for them to ever get out of the red.
What is Southern Water’s financial problem?
Southern Water, in particular, has been found to have significant financial difficulties, if the Moody’s credit rating is anything to go by.
It has downgraded its rating to Ba1 ‘junk’ status, which means the provider is likely to be unable to pay its debt.
Moody’s stated Southern Water has shown a “history of material operational and financial underperformance”.
The company has a financial deficit of more than £6 billion, and the new rating impacts on how much it will cost Southern Water to borrow in global markets.
Southern Water blames uncertainty over water regulation in the UK for its downgraded credit rating, and chief financial officer Stuart Ledger stated it “reflects the growing challenges and uncertainty faced by all companies operating in the UK water and wastewater sector”.
Ofwat will deliver a Final Determination in December, which Mr Ledger says will “alleviate much of the uncertainty around the sector and enable us to continue to improve our services for customers, with the support of our shareholders and lenders”.
Its Final Determination will set out a five-year price package, which will state how much will be invested to reduce pollution, flooding, droughts, leakages, mains bursts, financial support for customers, and cut water wastage.
Once this has been revealed, water providers will have a better idea of how much money will be put into improving the sector, freeing up some of its capital to repay the debt.
Southern Water also recently asked Ofwat if it could increase its customers’ bills to reduce this financial deficit. It wants to raise the average annual household bill to £734. This would make it more expensive than any other water provider in the UK.
The water regulator will make its final decision on bill increases by the end of the year, but Southern Water customers could see their average household bill almost double by 2030, up from £420 this year.
Large companies will feel this price increase even more substantially, as their bills are considerably higher.
Therefore, businesses should consider looking at other water providers in their area if Ofwat agrees to the price increase, as it could save them a significant amount of money on water bills over the next few years.
