SES Water is up for sale in the UK as Japanese owners pay £7.8m dividend

SES Water’s Japanese owners are paying a £7.8m dividend and putting the company up for sale as the UK’s private water companies come under pressure to invest in aging infrastructure.

The company, which supplies water to about 745,000 people in south-east London, West Sussex and Kent, was floated by its owners Sumitomo and Osaka Gas, according to two sources close to the sale process. Macquarie Capital acts as advisor to the companies.

It is understood that the Japanese owners of SES did not want to put any equity into the company and have instead opted to sell it, said a person close to the talks. The company is one of six water-only suppliers in England and is responsible for supplying Gatwick Airport, which was forced to close restaurants and toilets for a day after burst pipes last July.

Wastewater treatment in the area is provided by Thames Water and Southern Water, both of which could be potential buyers.

The sale comes as private water and sewage companies in England and Wales are facing the biggest wave of protests since privatization 33 years ago. The companies are accused of massive water leaks and pollution failures, including dumping unknown amounts of stormwater and sewage into coastal waters and rivers.

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

But even as water companies come under pressure to invest in infrastructure, regulator Ofwat is increasingly concerned about companies’ balance sheets. After being sold almost debt-free in privatization three decades ago, the companies have borrowed £60.6 billion and diverted revenue from customer bills to service interest.

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

Like other water companies, SES is under pressure from rising energy, chemical and labor costs, as well as the cost of servicing its £211m net debt.

Last year the company said its net funding costs nearly tripled from £5.5m in 2021 to £14.3m in the six months to the end of September 2022. Despite this, SES pays £7.8m in dividends in the year to March 2023.

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

But Philip Cope, an analyst at ratings agency Moody’s, said the increase in sales was in many cases not enough to offset rising cost pressures such as energy, which many companies had not fully hedged or pre-purchased beyond this year.

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

At 72 per cent, SES’s regulatory leverage ratio – a measure of indebtedness – is high, albeit 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.