The UK’s water watchdog has raised concerns over the financial health of three major water companies across England and Wales.
Ofwat said in its annual performance report that Southern Water, SES Water and Yorkshire Water all have weak levels of financial resilience.
It said it was investigating further amid worries that their poor financial health may be impacting their operational performance.
The regulator’s findings come as it also said that five firms – including Southern Water and SES Water – were lagging behind their rivals in terms of targets on areas such as leakage and failing to deliver for their customers.
It said the firms flagged in the report as under-performers – also including Thames Water, Bristol Water and South East Water – needed to catch up with their competitors and “do so quickly”.
Ofwat announced earlier this month that water firms will have to slash customer bills by more than £67 million next year after many failed to live up to standards set by themselves and the regulator.
It said in its annual report that while the overall financial resilience across the sector was good and still attracting investment, it was concerning to seek others with weak balance sheets.
The report also found that while dividends paid to its investors in 2020-21 were lower than in previous years, most companies fell short when it came to explaining their approach to making these payments.
It said only three firms adequately set out how their dividend decisions are linked to delivery for customers and the environment.
David Black, interim chief executive at Ofwat, said: “As providers of an essential public service, it is vital that water companies are financially resilient and also that they are transparent about their financial decisions.
“On both fronts, they have work to do.”
Ofwat said it would shortly publish proposals on how it plans to protect customers by boosting the financial resilience of water companies.
The report showed there had been some improvements in water company performance, in particular tackling leaks and maintaining a reliable supply through the pandemic.
But it showed firms were lacking in terms of environmental measures and pollution through sewer flooding.
Ofwat found only three companies achieved their annual internal sewer flooding target and, although just over half of companies met their pollution incidents target, the performance of many “has stagnated or deteriorated in recent years”.
Mr Black said: “Over the past year, we have seen some areas of progress in water company performance, most noticeably on tackling leakage and maintaining a reliable supply of services through the pandemic.
“But, on environmental measures, some companies are still falling short and they are not doing enough to confront the grim consequences of internal sewer flooding.
“Companies lagging behind need to catch up with the best performers and they need to do so quickly.”
It added that not one water company in England and Wales met the top customer service standard, as measured by the UK Customer Service Index.
Ofwat’s recent penalty announcement showed that Thames Water, the supplier for the London region, would have to slash bills by £53 million in the year ending March 2023 after failing to meet targets.
It was given the highest charge out of 17 water and waste-water suppliers across the two nations, but Southern Water will also have to forgo nearly £46 million and Southwest Water more than £15 million.