Specialist firm Macquarie Asset Management has reached an agreement to buy a majority stake in Southern Water and has plans to reduce pollution incidents by more than 50% (compared with 2019) over the next four years
Under an agreement reached with Southern Water’s existing shareholders, Macquarie Asset Management will invest, on behalf of long-term investors including pension funds and insurance companies, approximately £1 billion in new equity to recapitalise the business and implement a more sustainable financing strategy for Southern Water.
The capital injection will mean Southern Water can make significant investment to upgrade its network with £2 billion over the next four years of the current regulatory period. This will be used to fix the pipes, pumping stations, and sewers which are underperforming and causing harm to the local environment.
The major investment programme is equivalent to approximately £1,000 for each property in Southern Water’s catchment area and will be used to improve its operational and financial performance, financial resilience, and relationship with its customers.
Macquarie Asset Management has consulted extensively with Ofwat, the regulator of water and wastewater services in England and Wales. Macquarie Asset Management’s intentions for and commitments to Southern Water for the remaining four years of the regulatory period to 2025 to accelerate its transformation include:
Strengthening zero-tolerance to environmental pollution: a commitment to significantly improving Southern Water’s environmental track record, which Macquarie Asset Management recognises was one of the worst performing in the UK water sector in 2019. The company is implementing plans to reduce pollution incidents by more than 50% (compared with 2019 pollution incidents) over the next four years. There may be incidents, particularly in the next few years, but we anticipate a very low tolerance for such events amongst Southern Water’s management and the board.
Reducing leaks: via Southern Water’s significant investment programme, a commitment to reduce the number of water leaks in line with Ofwat’s guidance. The investment programme includes approximately £230 million of funding to upgrade Southern Water’s infrastructure, which management believes is critical to improving the quality and resilience of water and wastewater services, including to both minimise and manage pollution incidents more effectively.
Ensuring affordable customer bills: between now and 2025, a commitment to ensure average water and wastewater customer bills, in aggregate, do not rise by more than inflation. This commitment is in addition to honouring an existing £123 million customer rebate due to historical incidents.
Improving customer service: an aim to improve Southern Water’s customer service from the second worst performing in the UK water sector by addressing the root causes of complaints and enhancing Southern Water’s capacity to handle them more effectively.
In June “unscreened, untreated sewage” was discharged into the sea from Foreness Pumping Station resulting in the pollution being spread to 11 Thanet beaches and bays. This past week pollution has affected a stretch from Sheerness to Whitstable and Herne Bay.
The incident, which Southern Water says was caused by a lightning strike resulting in a power outage during an overnight storm, meant advice against going into the sea or the area of beach below the high water mark remained in place for just over 6 days – finally being lifted on June 23.
The Environment Agency is also investigating a further release from Foreness on June 27. There were also further combined sewer outfall releases at Ramsgate and Broadstairs this month and this morning (August 9) unconfirmed release alerts were shown for Stone, Joss, Botany and Viking bays, although these have since been removed.
In July Southern Water was fined a record £90million for illegally dumping raw sewage into the sea.
During a sentencing hearing at Canterbury Crown Court, it was heard the water company pumped an estimated 16bn to 21bn litres of untreated sewage into protected waters around the south coast.
Southern Water faced 51 sewage pollution charges which took place between 2010 and 2015.
The case was said to be the biggest ever brought by the Environment Agency after sewage was released across the south coast from 16 Wastewater treatment works and one sewer overflow.
Southern Water entered guilty pleas to all the offences, admitting 6,971 illegal spills from sites in Hampshire, Kent and West Sussex over five years.
‘Reduce negative impact on local environment’
Leigh Harrison, Head of Macquarie Infrastructure and Real Assets, said: “Southern Water needs significant investment to improve its operational and environmental performance, and financial health. Without it, the business will be unable to fulfil the expectations of the millions of customers that rely on its services each day or reduce its negative impact on the local environment.
“This major £1 billion equity investment by one of our long-term infrastructure funds will help put Southern Water back on a stable footing and enable an ambitious multi-year transformation plan to make essential water and wastewater services in the South East of England more sustainable and resilient.
“While we expect Southern Water will have made substantial progress in addressing its issues by the end of 2025, we acknowledge the business’ transformation will take time and that is why we intend to own our stake in Southern Water over multiple regulatory periods.”
Ian McAulay, Chief Executive Officer of Southern Water, said: “This is good news for our customers, the local environment, and the regional economy. This investment ensures we will be able to spend more than £2 billion in the next four years improving the resilience of our existing network to reduce pollution incidents and leakages.
“It strengthens our ability to tackle the longer-term challenges posed by climate change and population growth, at the same time as being responsible custodians of Southern England’s rivers and seas. With our long-term shareholders’ support, we are fully committed to protecting the local environment and providing the quality of service our customers deserve.
“Importantly, this new investment will help Southern Water create around 1,000 new jobs and expand our apprenticeship programme, assisting the economic recovery of our region as we tackle the global Covid-19 pandemic.”
Macquarie Group has operated in the UK for more than 30 years, opening its London headquarters in 1989.