The Investment Column: East Midlands shows largesse

It is no coincidence that the arrival of Nigel Rudd as chairman of East Midlands Electricity in 1994 saw a sharp turnaround in the regional electricity company's gearing. The Williams Holdings chairman and his management team have presided over a massive pounds 720m transfer of value to shareholders, encompassing special dividends and the distribution of the group's holding in the National Grid, over and above normal dividend payments.

Although this largesse has pushed up gearing to 60 per cent, the group's phenomenal cash flow means it is lower than expected and well below the management's target level of 80 per cent. But the shares slid 12p to 554p yesterday on disappointment at last year's total dividend increase of 9 per cent (to 31.6p) and comments which appeared to pour further cold water on bid prospects.

Generous by most standards, East Midlands' policy of rewarding shareholders has gone hand in hand with a decision to abandon the original post-privatisation management's diversification policy and concentrate on the core electricity business. The underlying impact of this strategy has been clouded by provisions, exceptionals and last year's review of electricity distribution by the industry regulator, Professor Stephen Littlechild. Stripping out the pounds 73.3m contribution from the National Grid from last year's results, East Midlands' profits were flat at pounds 214m. However, the figures were further complicated by the release of an pounds 11.4m restructuring provision and a pounds 20m gain on the disposal of the last of the peripheral operations. Even so, management can be well pleased that it held the fall in operating profits to pounds 189m, down from pounds 208m before, given that the price review cost pounds 31m.

The group has cut prices by 2.7 per cent this year and will have to find another pounds 30m of savings to offset the regulatory review. But with restructuring provisions of pounds 35m in hand, it is confident there is still plenty to go for on that front. Even so, profits are likely to dip to pounds 190m (from pounds 214m) this year, putting the shares on a forward multiple of seven. The group should be one of the best placed ahead of full deregulation in 1998. Hold.