Northumbrian profits up as water sector waits for Ofwat

Northumbrian Water said lower debt costs helped it to a first-half pre-tax profit hike of 12.8 per cent yesterday, but warned that Thursday's announcement by the water regulator on pricing for the next five years is the "key risk to the business".

Water bills could fall by an average of 4 per cent between 2010 and 2015 if Ofwat follows its own draft recommendations, issued in July, which said cuts are likely despite the regulated water companies asking for price rises. Under the proposals, Northumbrian will be one of the few water groups permitted to increase charges, by 0.9 per cent, after the group had asked permission to raise bills by 2.3 per cent.

The draft guidelines came after the industry asked for collective price hikes of 12 per cent. "There could be some scope for Ofwat's proposals to improve ... although we see a dramatic change in the outcome as unlikely," James Brand, an analyst at Deutsche Bank, said last week.

The companies have until January to respond to Ofwat's final decision. Several groups have been lobbying the watchdog since July, warning that they may have to ask shareholders for more cash, or scale back dividends, if the draft price cuts are imposed. Consumer groups largely welcomed the draft plans.

Northumbrian's managing director, John Cuthbert, yesterday ruled out a rights issue, saying that the company was well funded through the debt markets. However, he did concede that the group's dividend policy would be reviewed. "The board will have to take a view on the dividend. We were the first to publicly state our policy at the start of the current five-year period in 2005, but that policy may have to be changed."

The interim dividend was increased yesterday, to 4.39p a share from 4.29p in 2008. Lakis Athanasiou, an analyst at Evolution, said Northumbrian investors are likely to see less pressure on the dividend between 2010 and 2015. "Northumbrian will probably need to ease back real growth, but maintain dividend per share, while Severn Trent and United Utilities will most likely need to cut."

Interest payments on the group's debt, which is largely linked to the retail price index, fell by £14.5m, helping to boost first-half profits to £87m. Northumbrian said it had been hit by industrial customers using less water during the recession. Revenues increased by just 1 per cent in the period, with operating costs increasing by 1.3 per cent after a £1.7m bad debt charge.

Ofwat said in July that it is expecting the water companies to invest £21bn between 2010 and 2015. Much of the spending is likely to be earmarked for ensuring that sewage systems do not overflow during flooding.

United Utilities, which operates in the areas of the North-west hit by virulent floods over last few days, refused to comment on the cost of the heavy rains. However, Mr Cuthbert said that Northumbrian has invested at least £80m on preventing sewer floods caused by heavy rains since 2005, adding that the group was likely to spend a further "£120m to £125m in the next five years".