Thames rejects water giveaway

Company pledges 'lowest bills' into next century
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Thames Water shares slid 8p to 500p yesterday on disappointment that the third-biggest company in the water sector had failed to extend the same sort of largesse to shareholders as some of its peers.

Last month North West Water and then on Monday Anglian became the toast of the industry after announcing share price enhancing deals - involving special dividends, in the case of the former, and a share buy-back, in the case of the latter.

They came as part of packages involving simultaneous rebates for customers, which for those using North West's services should mean reductions in bills until well into the next century.

But Thames ruled out such an approach yesterday, despite unveiling a 26 per cent leap in pre-tax profits to pounds 304m for the year to March, which will only fuel the flames of the controversy about "excessive" water company profits and helped to prompt the rebates in the first place. The dividend rises 12 per cent to 25.3p, after a final of 17.1p.

Thames justified its decision not to make any special payouts by claiming that steady and significant year-by-year increases in the dividend, coupled with the lowest prices in the country were in the greater long-term interests of shareholders and customers than one-off payments which may be difficult to sustain.

Thames chief executive, Mike Hoffman, also made his own long-term commitment, stating: "Irrespective of any actions to reduce or rebate household prices elsewhere in England and Wales, we intend to maintain for our customers the lowest household bills for combined water and wastewater services into the next century."

Expectations in the sector were set aflame in March that shareholders - and to a lesser extent customers - would see windfall gains after North West, the biggest company, unveiled details of its package, leading to hopes that others would follow suit.

With four of the ten privatised water companies now having reported, those expectations look overdone. Yorkshire is widely expected to unveil its own package of measures alongside its results today [Wednesday], but apart from one or two special cases, few others are thought likely to follow North West's in its generosity.

Many have the financial strength, but are as likely to use it to attempt to increase customer satisfaction by raising capital spending to beyond the level required by the regulator as to pay out in hard cash.

After Yorkshire, which has said it is looking at additional payouts, and Northumbrian, which is facing a bid from the French group Lyonnaise des Eaux, Severn Trent, the second-biggest in the sector, Welsh and Southern are suggested as favourites due to their balance sheet strength.

Severn Trent has already indicated a limited customer support package, but just over half the pounds 48m available will come in the form of increased capital spending. Thames emphasised yesterday that over the past five years it had reinvested pounds 275m of the pounds 300m saved from its massive pounds 2bn capital investment programme. The money was spent on projects outside the requirements laid down by Ofwat.

These included bringing the new Thames ring main on stream 18 months ahead of schedule and improving an extra 23 sewage treatment works.

Although others may not go as far as Thames in ruling out extra payments entirely, they are likely to suggest that customers and shareholders will only benefit from future cost savings. These though may be harder to come by, given the tighter price control formula agreed with the regulator last year.

Despite receiving brickbats from many analysts yesterday, Thames appeared happy with last year's performance. The profits, achieved on a mere 6 per cent rise in sales to pounds 1.17bn, reflected tight control of costs, although they were flattered by a pounds 35m exceptional charge the previous year. The core UK utility operations generated the bulk of the profits at pounds 357m, up from pounds 317m, but losses overseas were cut from pounds 43m to pounds 13.9m.

Mr Hoffman defended the overseas ventures, which should see the first, a major project in Turkey, start in August. The pounds 9.2m spent on pre-contract activities was money well spent, he suggested, as foreign work represented Thames's biggest opportunity to extend and build on the experience of the existing water utility.