LONDON, July 30 (Reuters) - Moody's put Britain's

Southern Water on a "junk" rating downgrade warning on Tuesday,

less than a week after stripping the UK's most troubled provider

Thames Water of its investment grade score.

The rating agency cited this month's draft decision from UK

regulator Ofwat that Southern would not be allowed to raise

customer bills as much as requested, as well as tens of millions

of pounds of impending fines.

"The review for downgrade reflects our expectation that

Ofwat's draft determination would, if not materially changed...

result in severe Outcome Delivery Incentive penalties and total

expenditure allowances below the level needed to fund Southern

Water's investment programme," Moody's said.

"Together with an allowed return that falls significantly

short of Southern Water's actual cost of capital, such

under-performance may challenge the company's ability to raise

equity finance to maintain leverage at levels consistent with

the current rating," it added. That current rating is Baa3, the

last rung of investment grade.

Southern, which is majority owned by Australian investment

firm Macquarie, the former owner of Thames Water, said Moody's

warning have "no material impact" on the firm and over 850

million pounds of available liquidity.

It had asked Ofwat to be able to hike bills by 73%, the most

of all the English water providers, but the regulator proposed a

44% rise instead.

POLLUTION

Moody's also highlighted that Southern is in line to be hit

with at least 35 million pounds of "Outcome Delivery Incentive"

penalties, fines which are likely to continue to be £19 million

a year going forward, or £60 million if there are no

improvements.

Ofwat's draft determination would commit Southern Water to

reduce the number of pollution incidents by 81% compared to the

last four years. Most other companies are required to reduce

incidents by less than 30%.

Moody's calculated in a "plausible scenario" Southern will

need to raise 4.5 billion pounds ($5.8 billion) of debt and

equity between now and the end of the decade.

To maintain a "leverage ratio" at around 70% that raise

would need to include over 800 million pounds of net equity

contributions although there is "no certainty" that Macquarie

would provide the money, Moody's warned.

It said it was expected to conclude the rating review after

Ofwat publishes a final price determination plan in December,

although it could conclude it sooner if there was "material

additional information".

($1 = 0.7795 pounds)