Southern Water plans to pay out £275m in dividends despite rising debt pressures
The regulator has told Southern it can only increase bills to £603 annually but Southern wants to increase them to £734 on average by 2030.
It is against this backdrop that Southern has announced its proposed £3.8bn debt raise.
Influential ratings agency Moody’s in July said it was considering cutting Southern’s senior debt to junk status owing to fears over Ofwat’s final decision on bills, which could harm Southern’s ability to pay investors.
Bond markets have also turned against some of the company’s debt in recent months, with the yield on Southern’s 2026 bonds doubling to 13.5pc.
Southern needs to spend large sums on improving its network, but this may be made harder if it falls into junk territory because it would have to pay debt investors more in borrowing costs.
Macquarie said it is planning to put a further £650m into Southern between next year and 2030 to help keep its investment grade rating.
The move is forecast to push Southern’s debt-to-equity ratio to below 70pc in 2027 – a level it needs to maintain in order to pay out dividends under Ofwat’s rules.
Southern’s finance director Stuart Ledger said: “Raising debt for investment and rolling over existing bonds is a normal part of business.
“Our exciting plan for the next five years calls for our biggest ever investment to deliver environmental protection and a resilient water future for the region.”
On the dividends, Mr Ledger added: “Our original PR24 submission included assumptions for dividend payments. Our revised plan has grown due to new regulatory drivers and now anticipates a further £650m equity injection to support delivery of our record-breaking investment, rather than dividend payments.
“The company does know that investors contribute to the company in expectation of a return and we hope to return to prudent dividends in line with our stated dividend policy that we highlight in our financeability disclosure.”