The restructuring of the water industry gathered pace yesterday after AWG, the owner of Anglian Water, announced plans to split itself in two, refinance the regulated water business with debt and return up to £600m to shareholders.
Philip Fletcher, the head of Ofwat, made it clear he would not stand in the way of similar moves by other water companies, although he warned that there were risks involved in taking on such high levels of debts.
However, there are few signs that other water companies are about to follow AWG's lead. Neither Pennon, the owner of South West Water, which announces results today, nor Kelda, the parent company of Yorkshire Water, which reports next week, are ready to go ahead with similar restructuring schemes.
AWG plans to issue another £700m to £800m of bonds, taking its borrowings up to £3.4bn and leaving the regulated business Anglia Water Services 90 per cent debt-financed.
After the deduction of £200m in cash reserves for the regulated business and expenses, an estimated £400m to £600m will be available to return to shareholders.
Chris Mellor, AWG's chief executive, said customers would also benefit because it would cost Anglian less to finance its capital investment programme and the savings could be passed on to householders in the shape of lower bills.
AWG is also planning to introduce a new profit-sharing system whereby additional earnings above and beyond what is assumed in the regulatory price review will be divided equally between shareholders and customers.
Mr Fletcher said he had not raised any "fundamental" objections to the AWG plan which would block it from going ahead. But he added it was not the regulator's job to dictate the capital structure of the water industry.
"I need to ensure that customers are protected from excessive risk and that companies themselves are capable of financing their capital programmes not just now but in the future at a reasonable cost. But there are no free lunches. Companies may be reducing their financial flexibility and increasing their risk. If so, that is the responsibility of their shareholders, not their customers."
Mr Mellor indicated that AWG's initial and more radical plan to demerge the regulated business from the group's construction and infrastructure management arm had been blocked by the regulator. But Mr Fletcher denied this.
Under the compromise proposal approved by Ofwat, the two businesses will be operated at arms length from one another and the regulated water division will put up to 75 per cent of its contracts out to tender.
Mr Mellor said other water companies would be free to bid for the work. However, industry sources were sceptical of how much business would be won by outside companies as Mr Mellor will still be non-executive chairman of the regulated business while continuing as chief executive of AWG. Another executive director of AWG, Roy Pointer, will be managing director of the new water asset company.
The long-running restructuring exercise has already cost AWG £15m in fees to its investment banking advisers Schroder Salomon Smith Barney, Dresdner Kleinwort Wasserstein and Cazenove.
It will incur further hefty fees in connection with the bond issue, which is being conducted by Barclays Capital and Citicorp.Reuse content