Water firms set fair as inflation stokes prices

By Jon Rees
Updated: 04:57 EDT, 15 May 2011

When Bank of England Governor Mervyn King warned last week that rising gas and electricity costs would fuel inflation this year, he missed out another even more vital staple of life - water.

Water prices are linked to the Retail Prices Index and that has proved a key boost for the four main quoted water firms, which begin announcing their annual results next week.

Three - Severn Trent, Northumbrian and Pennon - have outperformed the FTSE All-Share index by more than 20 percentage points over the past year, while United Utilities managed a respectable seven-point outperformance.

And all four shares were near to year-highs at last Friday's close.

The water companies are in the first year of a five-year price settlement from regulator Ofwat, where some were forced to cut bills while others were allowed to increase them.

Ofwat trumpeted at the time that the settlement meant that across all water companies, average bills 'would remain at 2009 levels'. In parenthesis after that statement, its chief executive, Regina Finn, wrote the words 'excluding inflation'.

As King knows, excluding inflation is not an option. Indeed, from the start of the water firms' financial year on April 1, they were able to raise prices this year by the rate of inflation as measured last November - 4.7% - plus the changes specific to each company agreed with Ofwat. In some cases this will see bills rise by more than eight%.

The strongest performer out of the four quoted firms is Northumbrian, whose shares hit 359p at Friday's close. It was allowed to increase prices sharply and has benefited from continued speculation that its biggest shareholder --Canada's acquisitive Ontario Teachers' Pension Plan, which owns 28% - might bid for the firm or sell its stake.

At United Utilities, shares closed at 6211/2p. The company was forced to cut its prices after Ofwat's ruling, but new chief executive Steve Mogford is expected to announce alongside the results his first quantifiable targets for the company.

Pennon, which closed at 670p, has already said its Viridor waste operation is on track to deliver annual profits growth despite the harsh winter hampering its operations.

Shares of Severn Trent, meanwhile, reached 1497p and management has said it is confident it could meet or exceed its regulatory efficiency targets.

Pennon, which owns South West Water, reports full-year results to the end of March on May 24; United Utilities, which owns North West Water, on May 26; Severn Trent on 27 May and Northumbrian on June 1.