SES Water up for sale in UK as Japanese owners pay £7.8mn dividend

SES Water’s Japanese owners are paying a £7.8mn dividend and putting the business up for sale as the UK’s privately owned water companies come under pressure to invest in ageing infrastructure.

The company, which provides water for about 745,000 people in south-east London, West Sussex and Kent, has been put on the market by its owners Sumitomo and Osaka Gas, according to two sources close to the sales process. Macquarie Capital is acting as adviser to the companies.

SES’s Japanese owners are understood not to have wanted to put equity into the business and instead decided to sell, one person close to the discussions said. The company is one of six water-only providers in England and is responsible for supplying Gatwick airport, which was forced to close restaurants and toilets for one day last July after pipes burst.

Sewage treatment in the region is provided by Thames Water and Southern Water, either of which could emerge as a potential buyer.

The sale comes as privately owned water and sewage companies in England and Wales face the biggest wave of protests since privatisation 33 years ago. The companies are accused of massive water leakage and pollution failures, including tipping unknown quantities of storm water and sewage into coastal waters and rivers.

Around a fifth of treated water across the industry is lost in leakage while just 14 per cent of rivers meet the minimum standards for “good” ecological status, according to official figures.

However, even as water companies come under pressure to invest in infrastructure, regulator Ofwat is increasingly concerned with the companies’ balance sheets. After being sold with almost no debt at privatisation three decades ago, the companies have racked up borrowings of £60.6bn, diverting income from customer bills to service the interest.

In December, Ofwat said SES needed to strengthen its “financial resilience” alongside Southern Water, Thames Water, Yorkshire Water and Portsmouth Water.

As with other water companies, SES is under pressure from the rising cost of energy, chemicals and labour, as well as the cost of servicing its £211mn net debt.

Last year the company said that net financing costs had almost tripled from £5.5mn in 2021 to £14.3mn in the six months to the end of September 2022. Despite this, SES is paying dividends of £7.8mn in the year to March 2023.

Water and sewage companies are regional monopolies so the price they can charge customers is set every five years by Ofwat and allowed to increase with inflation. In April, the average household bill will rise by 7.5 per cent — increasing bills by an average £31 to £448 a year.

However, Philip Cope, analyst at rating agency Moody’s, said that in many cases the increase in revenues was not sufficient to offset rising cost pressures such as energy, which many companies had not fully hedged, or bought in advance, beyond this year.

Last month, Moody’s downgraded its outlook for the UK’s water industry from ‘stable’ to ‘negative’ because of the “ongoing regulatory and affordability pressures as well as a volatile macroeconomic environment.” More than 50 per cent of the debt held by water companies was inflation-linked at March 2022, Moody’s said.

At 72 per cent SES’s regulatory gearing — a measure of indebtedness — is high, though lower than Thames Water, which has 80.6 per cent, according to Ofwat.

SES, Macquarie Capital, Thames Water and Southern Water declined to comment. Sumitomo and Osaka Gas did not respond to requests for comment.