Southern Water has said it it is making progress on its Turnaround Plan under the leadership of a new executive team and with additional shareholder investment - CEO Lawrence Gosden says Southern is  "at the start of a long journey to change our performance as a company, and across the industry."

The announcement accompanies the publication of the water company’s annual report and financial statements for the year ended 31 March 2023.

In September 2021, funds managed by Macquarie Asset Management invested £1.1 billion of equity into the Southern Water group - the recapitalisation by a new majority shareholder was to facilitate Southern Water’s turnaround, including capital investment of £2 billion during the current AMP7 regulatory period (2020-25). This planned investment programme was in excess of the regulatory funding that Southern Water has received, equivalent to circa £1,000 per household in its catchment area.

Southern Water said it is making “good initial progress” and “fully expects” to be awarded two-star Environmental Performance Assessment rating by the Environment Agency for 2022, compares to one-star for 2021. The company acknowledges it has “further to go” - the Turnaround Plan sets out an ambition to reach a three-star EPA rating in 2025.

In April this year, Southern Water published additional detail on the Plan, reconfirming its determination to deliver on a series of ambitious targets, supported by a continuation of the step-change in investment and innovation. The statement released alongside the report and accounts says:

“In common with many companies and consumers, Southern Water has faced significant cost pressures over the last 18 months. These include above-inflation increases for energy, additional costs for the maintenance and upgrade of its network, and higher funding costs, even with significant de-leveraging in 2021. Under the current regulatory framework, water companies are not able to fully recover these significant cost increases.

“Given these inflationary cost pressures and our ambition in the Turnaround Plan to go further, we are now planning to invest £3 billion of capital investment during the current regulatory period (2020-25), equivalent to circa £1,500 per household in our catchment area.

“As such, we are engaged with our shareholders around a further £550 million of equity support for the Southern Water group, of which £375 million is anticipated to be injected into the Southern Water regulated entity ensuring that we maintain a prudent gearing ratio. Southern Water anticipates that this equity will be received by October 2023. However, as the process has not yet concluded, it has been disclosed as a material uncertainty in Southern Water’s annual report.”

The planned £550 million equity raise will enable Southern Water to maintain a prudent gearing ratio.

Southern Water group shareholders have not received any dividends since September 2017 – while gearing remains below 70%, the company does not anticipate paying a dividend for the remainder of the AMP7 regulatory period to March 2025.

Financial highlights

Southern Water’s operating loss has increased to £18.4 million compared to £16.1 million profit in 2022. Revenue decreased to £815.7 million (2022: £844.5 million), attributed principally to additional Outcome Delivery Incentives (ODI) payments to customers, and reduced consumption by households during the drought and generally.

Operating costs increased by £74.2 million. Inflation accounted for around £30 million of this increase and £22 million related to unplanned expenditure related to adverse weather and incidents

The company incurred £31 million of costs to support customers and environmental improvement in water and waste-water operations, partially offset by reductions in bad debt and debt collection costs.

Capital investment rose to £708 million in the year to March 2023, a 22% increase compared to the prior year

According to Southern Water, it is on-track to deliver more than £3 billion of capital investment during this regulatory period, the equivalent of more than £1,500 per household in its customer base.

Net financing costs increased by £82.4 million to £278.6 million, largely driven by higher indexation on inflation-linked debt. As with other companies in the sector – and consistent with the regulatory framework – Southern Water has a proportion of its debt linked to inflation.

As a consequence of a credit rating action announced by Fitch Ratings agency a credit rating downgrade Trigger Event has occurred and a financial ratio Trigger Event is expected under the company’s financing arrangements. As such, dividends will be suspended until the Trigger Events have been resolved

Key operational highlights

Key operational highlights flagged up in the annual report include:

• Leakage in Southern Water’s area is 17%, significantly lower than the UK industry average of 23% . The utility expects to achieve its leakage target at the end of the AMP7 regulatory period and is investing a further £100 million in reducing leakage (four times more than the regulatory allowance). Southern is targeting a further reduction in leakage in its area to less than 10% by 2050.
• Improved water quality with a reduction in the Compliance Risk Index score from 6.69 to 6.38
• 58% reduction in serious pollution incidents in 2022, reducing the number of incidents from 12 to 5
• 26% reduction in internal sewer flooding and a 5% reduction in external sewer flooding
• Completed roll-out of circa 24,000 sensors, providing real-time monitoring of its sewer network
• Increased discount on its social tariff, reducing the average combined bill from £402 to £221 for 113,000 vulnerable customers - rising to 128,000 by the end of the AMP7 regulatory period
• Customers continue to receive a discount as recognition that performance has not met expectations, with significant supply interruption incidents in Kent and Hampshire during the period

Commenting on the results, Lawrence Gosden, CEO said:

“I want to start by acknowledging that this has been a challenging year for our customers and our sector. In my first year 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 that I also recognise that we are at the start of a long journey to change our performance as a company, and across the industry.

“We have embarked upon an ambitious multi-year turnaround plan, and I am confident that we have laid strong foundations this year. Whilst I am encouraged by ‘green shoots’ of improvement, with progress on some key metrics that we expect to see reflected in a two-star EPA rating – I am not complacent. We know that we have more to do.”

A challenging financial year - “we are grateful for significant support from our shareholders”

Stuart Ledger, CFO added:

‘‘This has been a challenging financial year, with above-inflation rises in many of our cost lines exacerbated by the step-change we are making in investment levels.

“Our ultimate shareholders have not received a dividend for the sixth successive year, and do not anticipate receiving a dividend for the remainder of this regulatory period to March 2025. We are grateful for significant support from our shareholders; the £1.1 billion equity injection into the group in 2021 is enabling a step change in investment and an anticipated additional £550 million equity injection into the group before the end of October 2023 will ensure that the transformation plan remains on track.

“We also recognise that this is also a challenging time for our customers, with a cost-of-living crisis and above-inflationary costs impacting both households and businesses, so have increased our support package significantly, almost halving the bill for over 113,000 households.”

Both Lawrence Gosden and Stuart Ledger have declined a bonus for the year to March 2023.