Macquarie Asset Management commits further £550 million to support Southern Water Turnaround Plan

Funds managed by Macquarie Asset Management (“Macquarie”) have agreed to invest an additional £550 million of equity into the Southern Water group.

This additional equity funding will help Southern Water to maintain the momentum of its Turnaround Plan and manage the impact of a high inflation and interest rate environment on its operating, maintenance and funding costs. It will also enable Southern Water to increase capital investment in its network to £3 billion during this regulatory period (2020-25), equivalent to investing £1,500 per household in the company’s catchment area and representing a 50 per cent increase to the capital investment commitment made upon Macquarie’s acquisition.

Macquarie first invested in Southern Water in September 2021, bringing a £1.1 billion equity injection to facilitate additional investment and reduce leverage across the Southern Water group. Since then, Southern Water has appointed a new executive team and initiated a step-change in investment levels, with a circa 56 per cent increase in average annual capital expenditure.¹

The company’s Turnaround Plan is focused on ensuring a reliable supply of water for its customers; protecting and improving the health of rivers and seas by building capacity and resilience at its waste-water treatment works and sewer network; making its customer service easy and trusted; and becoming an industry-leader in health and safety.

Southern Water is making good initial progress on matters under its control:

• Achieved a two-star Environmental Performance Assessment Rating by the Environment Agency for 2022 (compared to a one-star rating in 2021). Southern Water is targeting a three-star rating by 2025;
• Completed the roll-out of circa 24,000 sensors, providing real-time monitoring of its sewer network;
• Fitted Event Duration Monitors on circa 99 per cent of its storm overflows. Southern Water is on-track to be at 100 per cent in the coming months, further enhancing its already industry-leading transparency;
• Continued to improve the operational performance and compliance of its pumping stations and treatment works, reducing serious pollution incidents by 58 per cent in 2022 compared to 2021, from 12 to 5;
• Maintained water leakage at 17 per cent, compared to the UK industry average of 23 per cent. Part of the additional investment will enable a further increase in mains replacement;
• Increased the discount on its social tariff to 45 per cent, reducing the average combined household bill from £439 to £241 for 121,000 vulnerable customers.² In a challenging cost of living environment, clean drinking water and waste-water treatment services for these vulnerable households has been reduced to 66 pence per day.

As well as improving operational performance to meet its existing regulatory obligations, Southern Water is also focused on additional actions to mitigate the causes of the 98 per cent of pollution incidents that are outside the direct control of the company, which result from rain-water run-off from highways and urban areas and groundwater entering the sewer network.

Southern Water’s Clean Rivers and Seas Task Force is collaborating with community and industry stakeholders to pilot new partnership delivery approaches to address this problem and retain more water in what is a water-stressed region. If supported by these partners, the initiative could address the challenges posed by climate change, population growth and ageing infrastructure while establishing Southern Water as a leader in tackling key sectoral challenges.

Martin Bradley, Macquarie Asset Management’s Head of Infrastructure in EMEA, said: “When we invested in Southern Water in 2021, we said its operational transformation would take time. Whilst the company is making good initial progress, maintaining this momentum depends on significant and sustained investment in its infrastructure. Instead of reducing our ambitions in the face of higher cost inflation and interest rates, we are backing Southern Water with additional equity, enabling it to invest circa £1 billion more than the funding it received via the regulatory framework for the period.

"Securing the ongoing investment needed to achieve the ambitions of Southern Water’s customers and stakeholders will rely on important decisions by its regulators. With rain-water run-off from highways and urban areas into the sewer network causing around 98 per cent of all pollution events in the Southern Water area, we also need a broader conversation on how we progress long-term solutions that relieve pressure on the UK’s legacy storm overflow system.”

Lawrence Gosden, Chief Executive Officer of Southern Water, said: “We would like to thank Macquarie for its continued support, which will enable us to increase investment per household to more than £1,500 this regulatory period and manage the impact of cost inflation and higher funding costs on our business. Macquarie’s additional investment is a strong vote of confidence in our operational transformation. It will help us to deliver on our ambitions to customers and position Southern Water well for our upcoming regulatory determination.”

Shareholders in the Southern Water group have not received any dividends since September 2017. The company does not anticipate making any distributions for the remainder of this regulatory period, reflecting the sustainable financing strategy adopted upon Macquarie investing in 2021.

The additional £550 million of equity funding will be provided to the Southern Water group by 31 October 2023, subject to the satisfaction of market standard conditions including mandatory regulatory filings.

1. Average capital investment in the full years ending March 2022 and March 2023 compared to the year prior to Macquarie’s initial investment (year ending March 2021)
2. Average annual dual bill for Southern Water customers in the year ending March 2023