Investment Column: Too early to be optimistic for AWG

AWG, the owner of Anglian Water, was owning up to past mistakes yesterday and promising that it would do better in future. As a new(ish) chief executive, Jonson Cox was able to freely criticise his predecessors' decisions.

AWG, the owner of Anglian Water, was owning up to past mistakes yesterday and promising that it would do better in future. As a new(ish) chief executive, Jonson Cox was able to freely criticise his predecessors' decisions.

His message was clear: the company got carried away by developing overly fancy strategies. From now, he pledged that the company would be "boringly predictable"' reliant on its core water business and making its non-regulated business meet basic business disciplines.

The price the company has had to pay for the past diversification strategy was clear: exceptional charges of £144m meant a pre-tax loss of £80m for the year ended 31 March. These charges were even higher than the market had expected.

The company tried to become an infrastructure manager on behalf of other utilities and it took its expertise to all corners of the earth, from the Czech republic to New Zealand to Chile. But AWG just did not have the financial firepower to serve the capital requirements of a UK and international business. It has had to sell out of these foreign operations at a considerable loss.

Another headache is the refinancing of the core water business carried out by AWG in 2002 when it adopted a "thin equity" model. That meant taking on a lot of debt (now £3.2bn). It remains to be seen whether the new regulatory regime - which comes into force next year - will favour this approach. Because of its debt, AWG has a low cost of capital, so if the regulator adopts a single cost of capital assumption for the whole industry in its calculations for deciding water prices, then AWG would be a big winner, but it is too early to be optimistic.

The company's shares at 622.5p also price in a pretty optimistic value for the non-regulated businesses. Even with a dividend yield of 8 per cent, the stock is best avoided.

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