TIDM31HI
RNS Number : 3937F
SW (Finance) I PLC
07 July 2023
7 July 2023
SW (FINANCE) I PLC
CORPORATE UPDATE: EQUITY RAISE, RATINGS AND TRIGGER EVENTS
-- Southern Water turnaround makes good initial progress
-- Shareholders, including funds managed by Macquarie Asset
Management, intend to invest an additional GBP550 million into the
Southern Water group
Annual Report and Financial Statements
SW (Finance) I Plc (the " Company ") announces that Southern
Water Services Limited (" Southern Water ") has today published its
annual report and financial statements for the year ended 31 March
2023. They are available here:
https://www.southernwater.co.uk/our-performance/reports/annual-reporting
Intention to raise an additional GBP550 million of equity
capital and Southern Water corporate update
In September 2021, funds managed by Macquarie Asset Management
invested GBP1.1 billion of equity into Southern Water and its
holding companies (" Southern Water group " or " the Group "). This
recapitalisation by a new majority shareholder facilitated Southern
Water announcing GBP2 billion of investment in its network during
the current regulatory period (2020-25). This investment programme
is in excess of the regulatory funding that Southern Water has
received and is equivalent to circa GBP1,000 per household in its
catchment area.
With this additional investment and the leadership of a new
executive team, Southern Water is making progress on its Turnaround
Plan [1] which is focused on ensuring a reliable supply of water
for its customers; protecting and improving the health of rivers
and seas by building capacity and resilience at its waste-water
treatment works and sewer network; making its customer service easy
and trusted; and becoming an industry-leader in health and safety.
Southern Water is making good progress and it expects a 2-star
Environmental Performance Assessment rating by the Environment
Agency for 2022, which compares to 1-star for 2021. Southern Water
recognises it has further to go, and its Turnaround Plan aims to
reach a 3-star EPA rating for 2025.
As with many companies, Southern Water has faced significant
cost pressures over the last 18 months, including above-inflation
increases for energy, costs for the maintenance and upgrade of its
network, and higher funding costs even with a significant
de-leveraging in 2021. Furthermore, Southern Water has ambition to
go further in its Turnaround Plan. As such, Southern Water now
intends to invest GBP3 billion in its network during the current
regulatory period, equivalent to circa GBP1,500 per household in
its catchment area. Under the current regulatory framework, water
companies are not able to fully recover these significant cost
increases within a regulatory period.
As such, to maintain the momentum of its Turnaround Plan,
Southern Water has engaged with its shareholders to seek an
additional GBP550 million of equity funding for the Southern Water
group of which GBP375m will be invested as equity into Southern
Water's regulated entity and GBP175m into its holding companies.
Southern Water expects this equity raise will successfully conclude
by the end of October 2023, with participation by funds managed by
Macquarie Asset Management and potentially other existing
shareholders. As the equity process has not yet concluded, it has
been disclosed as a material uncertainty with respect to the
Southern Water's going concern status in the annual report and
financial statements.
Southern Water group shareholders have not received any
dividends since September 2017. Although Southern Water's gearing
remains well below 70%, it does not anticipate paying a dividend
for the remainder of this regulatory period to March 2025. This
decision is in line with a conservative distribution policy.
Since the entry of a new majority shareholder in 2021, Southern
Water's yield on regulated equity is significantly lower than its
peers, as well as the guidance provided in the regulatory
framework. As committed to by its new majority shareholder,
Southern Water has also completed the closure of its Cayman Islands
subsidiary.
Ratings Downgrade and Trigger Event
Southern Water is investing significantly in its Turnaround Plan
and has maintained a strong investment-grade credit rating.
Together with the significant cost pressures and higher funding
costs, this results in a material increase in forecast expenditure
over and above the capital already committed to finance network
operational improvements as part of the Turnaround Plan.
The planned GBP375 million equity injection into Southern Water
will maintain a prudent gearing ratio, consistent with the
deleveraging of the Group since the equity recapitalisation in
2021. Interest cover ratios are forecast to be lower in this
regulatory period due to the additional expenditure. Southern Water
expects that the interest cover ratios will normalise in the next
regulatory period.
The Company and Southern Water confirm that the Conformed Class
A Adjusted ICR for the Test Period ending 31 March 2023 will be
below the Trigger Event level of 1.30 (and is estimated to be below
such level for the Test Periods ending 31 March 2024 and 31 March
2025) and the Conformed Class A Average Adjusted ICR for the
Rolling Average Period ending 31 March 2025 is estimated to be
below the Trigger Event level of 1.40.
The Company and Southern Water note the decision of Fitch
announced earlier today to downgrade the Class A Unwrapped Debt of
the Company to BBB (Negative Outlook) from BBB+ (Negative Outlook)
as a result, inter alia, of the lower interest cover ratios in
AMP7. Southern Water remains committed to maintaining a strong
investment-grade credit rating in the medium-term.
As a consequence of the Fitch credit rating action, a credit
rating downgrade Trigger Event has occurred and the level of the
Conformed Class A Adjusted ICR and the Conformed Class A Average
Adjusted ICR means that a financial ratio Trigger Event will occur
under the Company's financing arrangements. A Trigger Event has
certain specific consequences, which are designed to improve the
financial resilience of the Company and Southern Water, including
by prohibiting payment of dividends and placing restrictions on the
incurrence of certain Permitted Financial Indebtedness.
The Company and Southern Water will provide further updates, as
appropriate.
For further information, please contact Stuart Ledger (Group
CFO) at:
Address: Southern House, Yeoman Road, Worthing, BN13 3NX, United Kingdom
Tel: 01903 272 056
Email: stuart.ledger@southernwater.co.uk
DISCLAIMER - INTENDED ADDRESSEES
This announcement is a communication to the market. Nothing in
this announcement constitutes an offer of securities for sale in
the United States or any other jurisdiction. This announcement does
not constitute a prospectus or a prospectus equivalent
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END
[1]
https://www.southernwater.co.uk/media/8235/6579_ofwat_company_turnaround_plan.pdf
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IOEUPUQCMUPWGCM
(END) Dow Jones Newswires
July 07, 2023 10:47 ET (14:47 GMT)
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