If Pennon can find the millions to buy one of the most heavily indebted water companies then surely they don’t need to turn to SWW consumers to foot the catch-up costs of bringing our local sewage infrastructure up to date. – Owl  

[The Guardian reports this story under the headline: Owner of firm fined for sewage dumping buys Sutton and East Surrey Water]

Sutton and East Surrey Water, the privatised supplier to some of the wealthiest addresses in England, has been bailed out by Pennon, the owner of South West Water.

Robert Lea www.thetimes.co.uk

One of the most financially distressed water companies in the country, Sutton and East Surrey Water (SES) has been on an “at-risk” regulatory watchlist and has in recent months been forced to tap its Japanese owners for a cash injection.

Pennon, a FTSE 250 company, is raising £180 million from investors to help fund the takeover, valuing SES at £380 million. Sumitomo Corporation and Osaka Gas, SES’s owners, are to receive £89 million for their shares and the rest of Pennon’s money will go to reducing SES’s spiralling debts.

SES is one of the most heavily indebted of all England’s water companies, leveraged at more than 80 per cent of its asset base with net borrowings of £291 million on a regulatory capital value of £351 million. Ofwat, the regulator, says that water companies should not be leveraged at more than 65 per cent of their net assets.

The company is a peculiar hangover from water privatisation, in which it only supplies water to its stockbroker belt customers of 750,000 homes and businesses, from Sutton in the north to Gatwick in the south and from Cobham in the west along the M25 through Dorking and Reigate to Caterham and as far as Edenbridge in Kent. Households in the region have their sewage and wastewater looked after mainly by Thames Water.

Last year the company lost £31 million and announced it was going through a “strategic review” and attempting to find a buyer.

Despite demands from Ofwat that financially strapped water companies stop paying dividends, SES paid out more than £8 million last year. In the regulator’s latest report on the finances of the country’s water companies, SES was bracketed with the neighbouring troubled water giants Thames Water and Southern Water as among the least financially resilient.

Ofwat said of SES: “High inflation and operational issues have continued to put pressure on its reported financial metrics, with the company recognising further funding will be required to support its capital programme … and to strengthen financial resilience.”

S&P, the rating agency, recently gave SES a lowly credit rating of BBB (negative outlook), saying its “credit metrics were substantially below our expectations, largely owing to accretion on the company’s inflation-linked debt and a deterioration of operating margins”.

Sumitomo and Osaka Gas committed themselves last year to injecting £22 million into SES before the end of this financial year in March. It is understood that £14 million of that had already been pumped in and that is included within Pennon’s £89 million consideration.

The deal represents a poor return for the Japanese owners, who paid £164 million for the company in 2013, though they would have already recovered some of that money through past dividends.

SES has been led since 2020 by Iain Cain, the chief executive who is a former managing director of retail water and customer services at Thames Water. Cain was paid £544,000 last year, including bonuses of £235,000. That is marginally more than Susan Davy, the chief executive of Pennon, who forewent a £450,000 bonus.

Though on a much smaller scale, water industry sources confirmed the rescue of SES should be seen in the context of the financial crises at Thames and Southern. The shareholders of Thames have committed to pumping in £3.75 billion by 2030 to turn around its finances while Southern was saved from administration through a £1.65 billion deal with the Australian finance house Macquarie.