Moody’s downgrades SEW, as high demand causes further outages

(by Karma Loveday)

South East Water (SEW) found itself in breach of licence condition P26 – under which it is required to maintain two investment grade credit ratings – after Moody’s downgraded the backed and underlying senior secured ratings of its financing subsidiary South East Water (Finance) to Ba1 from Baa3. Moody’s concurrently assigned a Ba1 Corporate Family Rating and Ba2-PD probability of default rating to SEW. The outlook for both the regulated company and the financing subsidiary are negative.

SEW said its board was “constructively engaging with Ofwat… to agree certain commitments that will secure a return to compliance” and that these commitments would be communicated once agreed with the regulator. 

Resilience risk:

Moody’s said its action reflected “the rapid crystallisation of resilience risk for SEW following two high profile outages over winter 2025-26. The downgrade takes into account both the fallout from those outages and the continued resilience risk the company faces until its medium- to long-term investment programmes are completed.” New resilience challenges played out as the ratings action was announced (see below).

An aggravating factor for Moody’s was high social risk exacerbating political and media attention towards water company performance, which has “the potential to result in harsher eventual enforcement outcomes than would have been the case in the past".

SEW has already been issued with a £22m penalty for historic outages, and remains subject to a second Ofwat enforcement case over the 2025/26 supply failures. It is also in the Drinking Water Inspectorate’s Transformation Programme, which seeks to address the root cause of poor performance and formalise rectification into legal instruments. Both SEW’s chair and chief executive resigned following a damning report from the Environment Food and Rural Affairs Committee.

Moody’s noted that the Competition and Markets Authority redetermination offered some financial mitigation for the troubled company. This included a £134m cost allowance uplift, a halved maximum penalty for water supply interruptions underperformance, and a higher rate of return.

The ratings agency also noted SEW had benefited from a £200m equity injection a year ago, was liquid, and was expected to demonstrate solid financial metrics for the new rating level.

It added: “We expect SEW's resilience risk will be reduced following the conclusion of its AMP8 investment programme by March 2030. The company has also launched a turnaround programme which will focus, amongst other aims, on how to best manage currently underperforming assets prior to upgrades from the investment programme.”

Essential use only plea:

SEW last week asked customers to use water for essential purposes only after record-breaking heat caused demand to soar, depleting storage.

Around 18,000 properties were affected by no water or low pressure at the peak of the incident, which impacted towns including Maidstone, Ashford and Whitstable. At the time of writing, most supplies had been restored, but around 4,000 properties remain affected. Bottled water stations have been in action, tankers deployed, and special support provided for vulnerable customers and livestock.

The company continues to implore people to only use water for drinking, washing and cooking, suggesting water from baths, showers and sinks could be reused in the garden, and activities like washing cars and patios delayed.

Drought Plans:

In parallel, South East Water is consulting on its draft Drought Plan for 2027-32, until 6 August. The plan deals with dry weather as well as severe shortages, covering what actions the company will take and will ask customers to take from a “flexible toolbox” of short-term actions. 

Key updates to the 2022 plan included:

• Updated water demand triggers that better reflect modern peak summer usage.

• Initiating targeted, area-specific water-saving campaigns much earlier in the year.

• Closer coordination with catchment partnerships, wildlife trusts, and local authorities to protect river health.

• Clearer restriction exemptions for vulnerable customers on the Priority Services Register (PSR) and increased rainwater-harvesting support for farmers and landowners.

• New options that would be implemented in a very severe drought situation to avoid the need for emergency measures.

  
  

SEW's head of water resources Nick Price said: “During heatwaves, we now routinely see demand for drinking water increase by 20-30%, the equivalent of adding a town the size of Maidstone or Eastbourne overnight on to our supply network. Our core challenge is maintaining a reliable supply to customers while protecting a highly sensitive local ecosystem that includes 196 Sites of Special Scientific Interest and other precious water dependent habitats including chalk streams.”

Relatedly, Portsmouth Water has issued its draft Drought Plan for consultation, until 14 August. This includes lessons learnt from droughts in 2022 and 2025, new laws to protect the environment, and more actions to delay moving to emergency restrictions in a very severe drought.