In some respects, water companies are obvious candidates for enhanced scrips. Heavy capital spending means they have written off all their advance corporation tax for years.
Yet North West's scheme will dilute earnings by up to 4 per cent if it is taken up by 90 per cent of shareholders, despite a pounds 13m tax saving. Those institutions that were sounded out ahead of the deal gave the go- ahead only because North West has international interests with which Ofwat cannot interfere.
Meanwhile, the investment picture for the water sector is becoming cloudier by the day as regulatory uncertainty mounts. North West kicked off the industry reporting season with a 7.4 per cent rise in pre- tax profits to pounds 247m and an 8.8 per cent rise in dividend.
Anyone who bought shares at privatisation has seen a handsome return in capital gains and above-average dividend growth.
But fears about the likely shape of the regulatory regime after 1995 have already hit water shares - they fell by 10 per cent last month - and could undermine them further.
The fundamental issue is how to fund the billions needed to meet EC standards for drinking water, cleaner beaches and treatment of waste. At the extreme, the choice is between letting the consumer pay the bill (as is the case now) or shifting the burden on to shareholders.
As water investors have enjoyed a bonanza in the past few years, there is a case for them being made to pick up the remaining costs. In reality a compromise is inevitable.
North West's projected doubling of capital expenditure to pounds 4bn between 1995 and 2000 implies that water prices will have to climb annually by 8.5 per cent above inflation, against Ofwat's target industry average of 2 per cent.
Water companies could still be forced into much higher levels of borrowings or equity finance to bridge the gap. Either solution could restrict the sector's ability to deliver an above-average dividend growth. Time to bail out?Reuse content