Shareholders to feel the windfall pain

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Shareholders in privatised companies are set to bear the brunt of the pounds 5.2bn windfall tax announced in the Budget.

As the target companies begin reviews of how to foot the bill, early soundings suggest dividends will come under pressure.

BG, the gas transportation business of the old British Gas, still reeling from last month's rigorous report on pricing from the Monopolies and Mergers Commission, will announce its verdict on dividends in September.

Some observers now believe that a windfall bill of more than pounds 500m makes a dividend cut inevitable.

Water companies which face a higher than expected liability are also warning that dividend growth may have to be restricted.

An Anglian Water spokesman said: "The windfall tax restricts our ability to carry out discretionary expenditure. We are committed to improvements in infrastructure, and it's now money we don't have."

"Of course there will be an impact [on dividends], " said Graham Leftwich of Severn Trent. "We're having to service increased levels of debt. We just have to get on with running the business and working to minimise that debt."

But the water regulator, Ofwat, showed little sympathy for the industry. It is determined that customers will not end up footing the bill

"You only have to look at share dividends in this sector from last year's set of results," said an Ofwat spokesman. "If they have misjudged the size of the levy then that is a problem for their shareholders."

The worries over dividends were echoed by Standard & Poor's, the US credit ratings agency.

It said: "The relative size of the imposition on the water and electricity distribution sectors is greater than expected."

This will lead, it believes, to weaker financial profiles for all the utilities affected by the windfall tax.

"This could lead to a combination of new debt, equity infusions, lower dividends, use of reserves and further capital and operating expenditure reductions," S&P said.

A number of companies have now been put on "credit watch" with negative implications. Any downgrading in the credit rating could lead to higher borrowing costs.