Southern Water forced to suspend dividend payments by credit agency as debt costs soar

Southern Water has been forced to formally suspend dividend payments after a credit ratings agency downgraded its creditworthiness.

Fitch said it had downgraded Southern Water on the basis of the company’s surging debt and borrowing costs. The move sparked a “trigger” event that prevents the company from paying a share of its profits to its shareholders.

The firm provides water services to 2.5 million customers and wastewater services to more than 4.7 million customers across Sussex, Kent, Hampshire and the Isle of Wight.

Southern, which said it has not paid a dividend to its shareholders for six years, yesterday reported losses of £18.4m for the year to March. It made a £16.1m profit in 2022. Its revenues dropped to £815.7m, down from £844.5m last year.

Southern said its financing costs rose £82.4m to £278.6 million, “largely driven by higher indexation on inflation-linked debt.” 

The latest move has added to mounting concerns about the wider financial health of Britain’s water industry.

It follows revelations that Thames Water, one of the UK’s biggest water suppliers, had held talks with government officials and regulators over contingency plans including a possible temporary nationalisation.

Ofwat, the water regulator, has recommended an industry-wide 60 per cent debt level – the ratio of a firm’s debt compared with its share value.

But Southern Water’s debt level has hit 69 per cent, up from 65 per cent. It said it had secured an additional £550m investment from its major shareholder, Australian investor Macquarie.

Macquarie was the biggest shareholder in Thames Water for more than 10 years until 2017 and has been widely criticised for taking millions of pounds of dividends as the water company failed to address repeated pollution incidents.

In July 2021, Southern Water was fined a record £90m after admitting to being responsible for thousands of illegal discharges of sewage which polluted rivers and coastal waters in Kent, Hampshire and Sussex. The company pleaded guilty to 51 breaches of environmental law between 2010 and 2015.

The court were told Southern Water deliberately presented a misleading picture of compliance to the Environment Agency, hindering proper regulation of the company.

Southern’s chief executive, Lawrence Gosden, said: “I want to start by acknowledging that this has been a challenging year for our customers and our sector.

“I have been listening to what our customers and communities have to say, and rightfully they have been challenging us to do better and meet their expectations.

“I want to emphasise that we are responding to these challenges, and I also recognise that we are at the start of a long journey to change our performance as a company, and across the industry.”

Both Mr Godsen and finance chief Stuart Ledger said they would not be taking their bonuses.

Southern said it had increased its support package for household and business customers “significantly” and almost halved bills for more than 113,000 households.

Southern and other water companies are under growing pressure to invest billions of pounds to improve the UK’s water infrastructure in order to reduce sewage discharges into rivers and coastal waters, as well as coping better with climate change and higher temperatures.