Eastern Electricity sweetens profit fall with top payout rise: Generous dividends from regional companies have stoked City optimism that Offer's price regime will be softer than feared

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EASTERN Electricity sweetened a surprise fall in profits yesterday with the largest dividend rise so far in the regional electricity companies' reporting season that ends tomorrow.

Analysts said a 19.8 per cent jump in the payout provided evidence that next month's review of the companies' distribution operations by Offer, the industry regulator, will be less onerous than many feared a few months ago.

They believe companies would not have risked being so cavalier with dividends if they were really concerned about earnings growth. Of the companies that have reported figures so far, a 15 per cent rise in the payout was the most parsimonious.

Eastern's confidence, which was almost matched yesterday by Northern Electric's 16 per cent dividend increase, dispelled some of the gloom that has caused the sector to underperform the rest of the market this year.

The last two weeks' electricity results have been overshadowed by concerns about Offer's review. Because distribution provides the lion's shares of profits - between 85 and 97 per cent - the severity of the price formula which will apply from next April will dramatically colour the investment attractions of the RECs.

Eastern's 23p dividend, higher than expected, sweetened a 4 per cent fall in pre-tax profits to pounds 176m on turnover down by pounds 100m at pounds 1.85bn. Profits were hit by a pounds 38m restructuring charge to cover redundancies.

Eastern, the first of the RECs to say that it planned to buy back its own shares to boost earnings, added yesterday that it would be seeking permission to buy back a further 15 per cent after last year's 5 per cent repurchase.

Northern Electric, which also reported a sharp rise in dividend yesterday, was confident that Professor Stephen Littlechild's review would not affect its ability to grow dividends faster than the rate of inflation.

David Morris, chairman, promised that, after the review, Northern would deliver a 'meaningful' price cut to domestic and small business users.

After a 16 per cent rise in pre-tax profits to pounds 128.7m, which benefited from a dramatic improvement in the non-core retail, property and generation arms, Northern's dividend was increased 16 per cent to 24.85p.

Northern's comments on the sustainability of its dividend are the latest blows in a period of shadow-boxing between the RECs and Professor Littlechild. The posturing accelerated two weeks ago with a threat from London Electricity that an overly harsh regime would force it to call in the Monopolies and Mergers Commission to adjudicate.

As a result, its shares fell sharply on the day, although comments from Ofgas about rates of return from British Gas, contributed to the market's jitters.

The worries are justified given the generous nature of the price- capping formula laid down by the Government at the time of privatisation four years ago. Under that regime companies were allowed to raise prices by an average of 1.1 per cent above the rate of inflation.

That formula is widely accepted to have been a mistake because, unlike the privatised water firms, the RECs were not faced with large capital expenditure programmes.

In this respect they are much more akin to BT and British Gas, both of which have had their formulae revised sharply downwards.

What is not clear yet is whether Professor Littlechild will settle on an RPI-X formula, such as the ones that govern the gas and telecoms industries or a one-off reduction to take effect next April, which, by coinciding with the imposition of VAT on fuel at the full rate, would please the politicians.

A reduction of as much as 20 per cent has been suggested which, while drastic, is favoured by some in the industry as being less demoralising than constant contraction of profits under a tough price-capping formula.

Throughout recent discussions, Professor Littlechild will have been lobbied by consumer groups which claim that, even if he takes a very firm line, profits and dividends will continue rising because of the enormous scope for continued cost-cutting and the cushion of high dividend cover.

Swalec, which matched London with a 15 per cent jump in its dividend last week, confirmed analysts' belief that there is still room for efficiency improvements. Costs fell 8 per cent in real terms last year and further job cuts are planned.

One of the interesting developments of the results season has been the announcement from many of the RECs that they plan to seek permission to buy in a proportion of their shares. This has been welcomed in the City, partly because it will boost earnings per share and because it is seen as a better use of excess cash than the diversifications that have dogged some companies.

Since the beginning of 1991, electricity shares have more than doubled on average.

----------------------------------------------------------------- ELECTRICITY PROFITS AND DIVIDENDS ----------------------------------------------------------------- Pre-tax profit Total dividend Cover pounds Seeboard 131.7m up 17% 11.75p up 18% 3.2 Norweb 178.3m up 13.5% 23p up 15% 3.4 Midlands 195.4m up 17% 23.2p up 16% 2.8 East Midlands 51.2m down 66% 22.7p up 16% 2.8 Eastern 176m down 4% 23p up 20% 2.0 London 186.5m up 28% 22.5p up 15% 2.8 Manweb 126m up 13.6% 24.35p up 16% 3.4 Northern 128.7m up 15.5% 24.85p up 16% 3.2 South Wales 104m up 19.6% 25.6p up 15% 2.9 Southern 222m up 18.5% 22.7p up 16% 2.8 South Western* 117m up 15.7% 23.3p up 17% 3.1 Yorkshire* 179m up 14.7% 23.5p up 15% 2.6 *Market estimates -----------------------------------------------------------------

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