Debt and disruption: South East Water’s creaking infrastructure and finances
Under-fire utility paid almost as much in interest and dividends as it invested in network over past 15 years
South East Water, the utility hit by weeks of outages that left tens of thousands of customers without water, has paid almost as much in interest and dividends in the past 15 years as it has invested in its infrastructure.
The water monopoly, which serves about 2.2mn customers, paid out more than £1.3bn in interest and dividends between 2011 and 2025, according to research by Adam Leaver, an accountancy professor at the University of Sheffield.
The payments by South East’s operating company, comprising interest of £947mn and dividends of £401mn, were almost as large as the company’s £1.5bn in capital expenditure over the same period, a figure that includes investment in pipe networks and storage capacity.
South East’s operating company — the entity regulated by Ofwat — is saddled with £1.3bn of debt, more than four times its annual revenue.
“For years debt has been too high,” said Leaver. “With such large borrowings to service they are going to struggle to make the investments required . . . and they’re going to struggle to raise more debt because they are already geared to the hilt.”
The assessment comes after about 30,000 South East customers were hit by water outages over the past six weeks, with some left without supply for a fortnight before Christmas and affected again for much of last week.
The outages have added to pressure on the company, which blamed the latest disruption on burst pipes after stormy weather.
The University of Sheffield analysis comes amid questions about the financial sustainability of South East’s business, which operates in Kent, Sussex, Surrey and Berkshire, as well as those of other struggling UK water utilities.
The industry has suffered from years of under-investment while paying out dividends and interest to shareholders and lenders. Meanwhile, regulator-imposed price caps have limited the amount by which utilities can raise bills to fund infrastructure improvements and investor payouts.
South East said: “Interest payments are a normal cost of doing business, and debt is an efficient and standard component of corporate structures.”
It said no dividends had left its holding company HDF (UK) Holdings since 2018-19 and that its interest costs were “not disproportionate to the rest of the sector”. The company said it did not agree that it was “geared to the hilt” and that its leverage was in line with the rest of the industry.
It added that including a £136mn special dividend from 2020 in the University of Sheffield analysis was “misleading” as this was a “technical accounting measure approved by Ofwat to simplify group financing, not a cash payout to shareholders”.
Excluding that £136mn dividend, the company has paid more than £1.2bn in dividends and interest in the past 15 years.
South East is on Ofwat’s watch list of financially stressed companies and the regulator last year banned the company from paying dividends. Auditors at PwC warned in South East’s accounts for the year to March 2025 that uncertainty surrounded the group’s ability to continue as a going concern.
The company’s accounts show it made an operating profit of £54.5mn for the year to the end of March 2025 but fell to a pre-tax loss of £19.8mn after accounting for debt-servicing costs. Meanwhile, interest of more than 10 per cent is being charged on some shareholder loans to its holding company.
Leaver said the “company is in severe financial trouble and it is unclear how the issues will be resolved”.
South East said it had adequate liquidity, maintained investment-grade credit ratings and did not recognise the assertion that “it is in severe financial trouble”.
The group is owned, through its holding company, by the Utilities Trust of Australia, which has a 50 per cent share, Canadian financial group Desjardins, with 25 per cent, and the NatWest Group Pension Fund, with 25 per cent.
The regulated company has since December 2024 received £275mn in funding from new equity injections. This has been used to reduce gearing — a measure of debt to equity — by repaying a variable-rate loan and a revolving credit facility.
Since then, it has organised a £150mn revolving credit facility and £30mn term loan.
South East said the new financing arrangements meant the going concern warning had been “formally lifted” in its interim report for the six months to September 2025.
In a letter to the Competition and Markets Authority in June, seen by the FT, South East’s shareholders said their equity injection was driven by the need to protect their existing investment and to prevent corporate collapse but should not be seen as an indication that the company was “financeable”.
“If we did not already have significant investments in South East Water, we would not allocate capital to the water sector (including South East Water) at this time,” they said.
The push came as part of an appeal to the CMA to approve a further increase in bills on top of a 38 per cent rise approved by Ofwat, which would take the average customer bill to £339 annually after inflation by 2030. The CMA has provisionally approved an additional increase but a final decision is due in March.
South East said the CMA’s provisional decision “significantly improves the investability” of its business plan, “validating the concerns raised” in the letter.
Hugo Llewelyn, chief executive of social infrastructure fund manager Newcore Capital, said the crisis at South East stemmed from financially unsustainable practices “the sorts of which shouldn’t be allowed in the ownership of societally critical infrastructure”.
South East said it disagreed.
South East is the subject of two investigations by Ofwat over customer service and a failure to maintain adequate water supplies.
Any finding that it has breached its licence conditions could result in a fine of up to 10 per cent of annual turnover — a penalty of about £28mn based on its most recent accounts. Emma Reynolds, environment secretary, has called on Ofwat to consider whether the company should lose its operating licence.
South East’s debt has increased over more than two decades since it was bought by Macquarie in 2003. Its debt rose more than fourfold to £458mn under the Australian infrastructure group’s ownership before it was sold to investors including Utilities Trust of Australia in 2006.
Macquarie also held stakes in Thames Water between 2006 and 2017, during which time the utility’s debt rose from £3.4bn to £10.8bn, contributing to its current precarious financial position. Macquarie, which now owns Southern Water, declined to comment.
South East said its capital expenditure “is constrained by the allowances set by Ofwat at each regulatory review”, adding that it had requested a significant increase for the upcoming review period “to further shore up infrastructure resilience”.
It said it expected funding for future improvements would be available provided the outcome of the next regulatory review “is sufficiently attractive to investors”.
The owners did not comment on the University of Sheffield assessment, but Utilities Trust of Australia, NatWest Group Pension Fund and Desjardins said they were in contact with South East’s board to ensure service issues were resolved.