Southern Water sinks to record operating loss

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Southern Water has swung to a record £72mn annual operating loss as rampant energy price rises and heavy rainfall piled more pressure on the heavily-indebted utility’s financial plumbing.

The company, which provides water and sewerage services for 4.7mn customers in the south-east of England, said in its annual report released on Thursday that it had been hit by a sharp increase in energy, chemical and labour costs for the year ending March 2024.

The group, which is backed by Macquarie, also recorded a £27.9mn rise in the cost of tankering, used to carry sewage away to prevent homes and streets flooding. Other charges included a £4.5mn cost due to a cyber attack at the start of the year — in which data belonging to 5-10 per cent of its customers was stolen — and a £2.11mn penalty from regulator Ofwat after it missed regulatory targets on the number of mains repairs.

Southern confirmed the loss was its highest on record since privatisation and declined to comment further.

The report comes just a week after Ofwat said Southern’s finances had “further deteriorated” over the past year, solidifying its place on the regulator’s financially at-risk list, along with Thames Water and another eight companies.

The UK’s privatised water utilities are facing the biggest wave of public protests since they were transferred from public ownership 34 years ago as they come under pressure to address sewage pollution, leakage and water outages. At the same time, the sector faces higher borrowing costs on its collective £74.5bn in debt. 

The industry is currently negotiating an increase to customer bills with a decision from Ofwat expected by Christmas. 

Southern has asked Ofwat to allow it to increase the average annual household water bill to £734 in real terms by 2030, more than any other water company in the UK. The group needs the increase to help support a £650mn equity raise and a further £3.8bn in debt that is needed over the next five years.

“Our bills will need to increase by between 50 per cent to 75 per cent by 2030,” said Southern’s CEO Lawrence Gosden in the annual report, adding: “This enables us to keep pace with the rising cost of materials and energy, but also fund the scale of ambitious investment needed.”

Southern faces a number of environmental issues including a high risk of drought. It is in discussions with Extreme Drought Resilience Service, a private company that supplies bottled water from Norway, to ship water from the Norwegian fjords to south-east England by tanker in the case of extreme drought. It is also building the first reservoir in England and Wales in more than 30 years at Havant Thicket in Hampshire, in conjunction with Portsmouth Water.

Southern’s majority owner Macquarie also previously owned Thames, where it was widely criticised for taking on more debt, extracting high dividends and awarding generous pay packages. Gosden, who had joined from Thames, took a £183,000 bonus this year despite the company’s troubles.

“At Thames Water during Macquarie’s tenure large amounts of dividends were paid, we have changed the rules around that to be very clear that dividends need to be linked to performance,” said Ofwat chief executive David Black at a committee hearing on Tuesday.

Losses at Southern’s operating company are piling more pressure on the group’s heavily-indebted capital structure, which in recent weeks has been the subject of increasing scrutiny by rating agencies and investors.

Rating agency Moody’s this month downgraded Southern’s credit rating to junk, pushing it to the verge of default, while other agencies S&P and Fitch have the utility on review for further downgrades.

Downgrades from one of the other two would not only make borrowing costs more expensive but trigger a default across its £6bn debt pile, according to Southern’s bond documentation.