Southern Water announces £550mn investment from Macquarie

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UK utility Southern Water has said its biggest backer will invest £550mn into the business, the latest company to seek additional cash as concerns grow about the sector’s financial health.

The slated equity injection from Australian investor Macquarie comes the same day that ratings provider Fitch downgraded the water utility, citing its high interest costs and operational challenges.

The announcement is the latest action taken by shareholders in UK water companies, which are struggling under a combined £60bn of debt and coming under increasing pressure from rising inflation.

The financial strength of five companies — Thames Water, Southern Water, SES Water, Portsmouth Water and Yorkshire Water — is under particular scrutiny from regulator Ofwat.

Thames Water, England’s largest water company, was plunged into chaos last week after its chief executive resigned unexpectedly. An expected £1bn of additional investment from shareholders has not yet materialised.

Yorkshire Water also announced it was raising £500mn from shareholders to shore up its balance sheet.

Southern Water provides services to 2.6mn customers across Kent, Sussex, Hampshire and the Isle of Wight.

The company, which is owned by Macquarie Asset Management, received £1.1bn in investment in 2021 to help facilitate £2bn of new investment in its network.

The business has come under increasing pressure over the past 18 months as it faces above-inflation increases in energy costs while also needing to make significant investments in upgrading its business.

The company was fined £90mn in July 2021 for dumping between 16bn litres and 21bn litres of sewage — the equivalent of 7,400 Olympic-sized swimming pools — between 2010 and 2015.

Southern said net financing costs had increased by more than £80mn to £279mn in the year to April 1, partly because of its inflation-linked debt.

Of the promised investment, £375mn will go into Southern Water’s regulated entity and £175mn into its holding companies, the group said in a statement.

“Following our £1.1bn equity injection in 2021, we are committed to ensuring Southern Water has the resources it needs to continue to improve its operational and environmental performance as part of its turnround plan,” Macquarie said in a statement.

Southern Water said it expected the equity raising to be completed by the end of October 2023, with participation from Macquarie and other shareholders.

However, as the new investment has not been finalised, it has been included as a “material uncertainty with respect to the Southern Water’s going concern status”, it said.

Friday’s downgrade by Fitch prompted a so-called trigger event, which prohibits shareholders paying themselves dividends, as well as placing restrictions on how much debt the company can take on.

The expected equity injection from Macquarie comes six years after the Australian company sold its final stake in Thames Water to institutional investors from Canada and Kuwait.

Macquarie was the largest investor in Thames Water between 2006 and 2017 and was widely criticised for extracting millions of pounds in dividends as the utility struggled with leakages and pollution failures.

Macquarie reached a deal to acquire a majority stake in Southern Water in 2021. At the time the asset manager agreed to invest more than £1bn in new equity to recapitalise the business and implement a more sustainable financing strategy.