Water and power may not mix

Welsh multi-utility Hyder could be hit hard by a windfall tax and a tougher regulatory regime

The new breed of multi-utility - where water, electricity, and occasionally gas, are all sold by the same company - will face their sternest test if a Labour government is returned at the next election.

As well as the prospect of a windfall tax, there are mutterings of a tougher regulatory regime. To be at the helm of one utility sounds tough; to have two or three sounds disastrous.

With Tory fortunes at their nadir, is there a case for holding on to shares in such companies, faced as they are by the threat of a windfall tax - and possibly, a tougher regulatory regime? More details of Labour plans may emerge at the annual conference in Blackpool which opens today.

Hyder, the Welsh electricity and water company, which is also dabbling in gas, typifies the pros and cons of this new sub-sector. Formed through the merger of Welsh Water and Swalec, the South Wales Electricity Company, which was concluded in January, the rationale for the deal has had a mixed reception from investors.

But whatever the misgivings, shares in Welsh Water (as was) like most utilities, have enjoyed a tremendous run over the past five years, and have comfortably outperformed the market. Doubts have grown this year, however, with the shares having had a much rougher ride.

Some would urge that now is the time to consider whether Hyder still qualifies as a long-term holding in the investor's portfolio. Fears about a Labour regime returned when, following the company's last results in June, it announced 900 job cuts. Frank Dobson, shadow environment secretary, said that profits and dividends remained "scandalously high", and that they reinforced Labour's case for a "windfall levy on the excessive profits of the water industry".

As a joint utility, the company could be hit doubly hard. Unsurprisingly, finance director Paul Twamley finds it hard to swallow the prospect of a special tax. "Ultimately, a windfall tax is arbitrary, and lacks any equity," he says, pressing for a tax on turnover not profits.

The latest thinking suggests a windfall tax could raise from pounds 3bn to pounds 5bn from water and electricity companies, with the water firms likely to come off slightly less the worse for wear.

Although these are big numbers, utilities will not go out of business. Dr Angela Whelan, of brokers Credit Lyonnais, believes the fears are overdone, that the tax may prove far smaller than anticipated, and that water shares are undervalued.

Such speculation apart, some compelling figures are finally emerging to justify the benefits of the merger. In its last set of yearly figures, the company had identified pounds 100m of savings over the next four years. Of that, emphasises Mr Twamley, pounds 46m was not available to the individual companies before the merger. Overall, cost savings by 2000 will total pounds 275m.

Those savings are the key to such mergers. Utilities have difficulty increasing turnover, and in the case of electricity, are under increasing pressure on margins and sales. Combining the billing departments of electricity and water companies is an obvious move - even though the full benefit, of a single itemised bill for both services, cannot be introduced because of regulatory practice.

The consequence of this is the prospect of an annualised rate of dividend growth of up to 14 per cent through to the next century - a sweetener to offset any levy.

Alongside the threat of a punitive tax, hovers the overweening pre-eminence of the regulators. Given the captive customer base, the only way to ensure a fair deal for the consumer, and a semblance of competition, is through the work of the regulator.

Diversifying the business brings benefits, but also exposes Welsh Water's original shareholders to the action of the electricity regulator, Professor Stephen Littlechild. Electricity regulation is more complicated, partly because of the nature of the market. Hyder has managed to cut a benign deal with Ofwat, the water regulator, but its electricity business may yet face tougher measures.

Nevertheless, cost-cutting is a finite road. Hyder is divesting its stake in unrelated businesses acquired from Swalec, including its 40 per cent stake in CableTel South Wales, worth about pounds 50m or so. After a bit more fine-tuning of this sort, the next quest is for growth outside the core utility businesses. Here the company is keen to play down the theme of diversification, saying any business it ventures into will rely on skills already present in the company.

Among the areas it is plugging away at is transport. Through the consortium UK Highways, it has a contract to upgrade and maintain the M40 as part of the Government's Private Finance Initiative. Last week, it won the mandate to build the Lewisham extension to the Docklands Light Railway extension. Hyder has a 40 per cent stake in the project.

Elsewhere in the world, Hyder Infrastructure Developments has 3000 staff, working on road, rail and port developments in China, Thailand, Kuala Lumpur and Hong Kong. Road deals in the UK are at an early stage.

Hyder is confident it can generate the sorts of returns on these projects that shareholders have grown accustomed to elsewhere in the business. But despite the encouraging signs, Labour remains a dark horse. The shares remain a hold, until current uncertainty is removed.

Suggested Topics
News
people
Arts and Entertainment
Joel Edgerton, John Turturro and Christian Bale in Exodus: Gods and Kings
film Ridley Scott reveals truth behind casting decisions of Exodus
News
people
Sport
footballArsenal 2 Borussia Dortmund 0: And they can still top the group
PROMOTED VIDEO
Arts and Entertainment
An unseen image of Kurt Cobain at home featured in the film 'Kurt Cobain: Montage of Heck'
filmThe singers widow and former bandmates have approved project
News
Andy Murray with his girlfriend of nine years, Kim Sears who he has got engaged to
peopleWimbledon champion announces engagement to girlfriend Kim Sears
Arts and Entertainment
Jake Quickenden and Edwina Currie are joining the I'm A Celebrity...Get Me Out Of Here! camp
tv
Arts and Entertainment
George Mpanga has been shortlisted for the Critics’ Choice prize
music
News
Albert Camus (left) and Jean-Paul Sartre fell out in 1952 and did not speak again before Camus’s death
people
Arts and Entertainment
Roisin, James and Sanjay in the boardroom
tvReview: This week's failing project manager had to go
News
ebooksNow available in paperback
News
Ed Miliband visiting the Holocaust museum in Jerusalem. The Labour leader has spoken more openly of his heritage recently
newsAttacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But are the barbs more sinister?
Arts and Entertainment
'Felfie' (2014) by Alison Jackson
photographyNew exhibition shows how female creatives are changing the way women are portrayed in advertising
News
i100
Life and Style
Fright night: the board game dates back to at least 1890
life
Environment
The vaquita is being killed by fishermen trying to catch the totoaba fish, which is prized in China
environmentJust 97 of the 'world's cutest' sea mammals remain
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Langley James : IT Support; Helpdesk, VMware; Manchester, £18k

£16000 - £18000 per annum: Langley James : IT Support; Helpdesk, VMware; Manch...

h2 Recruit Ltd: Business Development Manager - HRO - £70k+ ote

£35000 - £450000 per annum + £3k car, £70k ote: h2 Recruit Ltd: Do you want to...

Citifocus Ltd: Newly Qualified Accountants - Risk Mgmt

£Attractive Package: Citifocus Ltd: Prestigious financial institution seeks to...

Citifocus Ltd: Operational Risk Analyst

£Negotiable: Citifocus Ltd: Experienced operational risk professional with ban...

Day In a Page

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

Sol Campbell cries foul at Labour's mansion tax

The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

Sarkozy returns

The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
Is the criticism of Ed Miliband a coded form of anti-Semitism?

Is the criticism of Miliband anti-Semitic?

Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

Ouija boards are the must-have festive gift

Simon Usborne explores the appeal - and mysteries - of a century-old parlour game
There's a Good Girl exhibition: How female creatives are changing the way women are portrayed in advertising

In pictures: There's a Good Girl exhibition

The new exhibition reveals how female creatives are changing the way women are portrayed in advertising
UK firm Biscuiteers is giving cookies a makeover - from advent calendars to doll's houses

UK firm Biscuiteers is giving cookies a makeover

It worked with cupcakes, doughnuts and macarons so no wonder someone decided to revamp the humble biscuit
Can SkySaga capture the Minecraft magic?

Can SkySaga capture the Minecraft magic?

It's no surprise that the building game born in Sweden in 2009 and now played by millions, has imitators keen to construct their own mega money-spinner
The King's School is way ahead of the pack when it comes to using the latest classroom technology

Staying connected: The King's School

The school in Cambridgeshire is ahead of the pack when it comes to using the latest classroom technology. Richard Garner discovers how teachers and pupils stay connected
Christmas 2014: 23 best women's perfumes

Festively fragrant: the best women's perfumes

Give a loved one a luxe fragrance this year or treat yourself to a sensual pick-me-up
Arsenal vs Borussia Dortmund: Alex Oxlade-Chamberlain celebrates century with trademark display of speed and intuition

Arsenal vs Borussia Dortmund

The Ox celebrates century with trademark display of speed and intuition
Billy Joe Saunders vs Chris Eubank Jnr: When two worlds collide

When two worlds collide

Traveller Billy Joe Saunders did not have a pampered public-school upbringing - unlike Saturday’s opponent Chris Eubank Jnr
Homeless Veterans Christmas Appeal: Drifting and forgotten - turning lives around for ex-soldiers

Homeless Veterans Christmas Appeal: Turning lives around for ex-soldiers

Our partner charities help veterans on the brink – and get them back on their feet
Putin’s far-right ambition: Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU

Putin’s far-right ambition

Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU
Tove Jansson's Moominland: What was the inspiration for Finland's most famous family?

Escape to Moominland

What was the inspiration for Finland's most famous family?