Water companies sparkle as regulator fast tracks their spending and pricing plans

Russ Mould
31 January 2019

“It may come as a surprise to many investors, given pressure from customers and the regulator, not to mention the perceived threat of a Labour Government and its renationalisation plans, but the water utilities have performed relatively well over the past year and today’s initial pricing review from Ofwat for 2020-2025 could give Severn Trent, United Utilities and Pennon a further boost,” says Russ Mould, AJ Bell Investment Director.

“All three have been given fast-track status by the regulator. This means they can now begin to put financing in place for their spending plans and prepare to implement their new pricing proposals. This also means analysts can make forecasts for profits, cash flow and above all dividends with greater certainty.

 

Share price

Share price

 

2019 E

 

 

pence

Change, last year

PE

Dividend yield

Dividend cover

Pennon

702p

+5.9%

13.5x

5.8%

1.27x

United Utilities

932p

+12.7%

14.8x

5.1%

1.32x

Severn Trent

1,975p

+1.1%

14.3x

5.0%

1.37x

Source: Webfg, consensus analysts’ forecasts, Refinitiv data

“Analysts had feared a tougher outcome with United Utilities seen by some as in danger of suffering a rejection of its plans. 

“This is not to say that Ofwat has rolled over and let the water companies have it all their own way. 

“The regulator, perhaps in response to widespread criticism from both customers and also a cross-party of MPs on the environment, food and rural affairs committee that it had been too soft, and let water companies pay themselves too much, pay out dividends that are too lavish and do too little to tackle leaks, has asked 14 water companies to reconsider the pricing and investment proposals they filed last year for the 2020-2025 period.

“Thames Water, regularly criticised for its perceived reliance on debt to goose financial returns, lofty dividend payments and poor performance on leaks, has been placed in the lowest category by the regulator.

“This means the regulator has achieved the bell-curve shape that it was seeking with its regulatory findings, with some utilities fast tracked, some asked for further work and some required to undergo a major rethink.

“Ofwat is clearly determined to drive outperformance from the utilities, to the particular benefit of the consumer and also the environment, with water providers asked to reflect financing gains in their pricing plans and ensure that executive pay and shareholder dividends reflect the service and results offered to customers.    

Category

Regulator’s assessment

Fast track

 

Severn Trent

“Plans ready to implement. Receive financial benefit, early

South West Water (Pennon)

decisions and early certainty”

United Utilities

 

 

 

Slow track

 

Anglian

“Further work to do on plans”

Bristol

 

Dŵr Cymru

 

Northumbrian

 

Portsmouth

 

SES

 

South East

 

South Staffs

 

Wessex

 

Yorkshire

 

 

 

Significant scrutiny

 

Affinity

“Substantially rework and resubmit plans. Increased

Hafren Dyfrdwy

regulatory scrutiny.”

Southern

 

Thames

 

Source: Ofwat

“The rapid affirmation of the big three quoted utilities’ plans could also bring benefits for their suppliers and equipment and services, who will be helping them to implement the spending plans approved by the regulator for 2020-2025 under AMP7 (asset management programme). These include companies such as equipment hire specialist VP and also infrastructure services group Renew Holdings.”

Follow us: