Profit rise renews talk of takeover at water group

Jun 5 2008 by Peter McCusker, The Journal

NORTHUMBRIAN Water’s profits have surged ahead of expectations, despite its decision to peg price rises to inflation last year, fuelling further takeover speculation.

The Durham company, which serves 2.6 million people in the region and 1.7 million in the South through its Essex & Suffolk Water group, announced a 15.2% rise in pre-tax profits to £170.3m in the year to March 31.

Managing director John Cuthbert said the company expected to take an £8m hit with rising fuel costs but pledged to not to pass it on in water charge rises in the next financial year.

He said: “This is a pretty sound financial performance coupled with good outputs on most of the important measures which we are assessed on. We get scored very highly on customer satisfaction and value for money by customers. We regard that as an important testament to what we are trying to do.” Profits were boosted by lower-than-expected operating costs for the water arm of the business. They were £1.4m less than the estimate Northumbrian gave water regulator Ofwat in 2004.

However, higher energy prices will add more than £8m to operating costs in 2008/9. Mr Cuthbert said this was a business risk that would be absorbed by the company.

And he said Northumbrian had no regrets it had chosen to limit price increases to the level of inflation for 2008 and 2009, before the next round of price negotiations with Ofwat. “This business is a long-term business,” he said. “The board looked at the financial profile, the commitments the business had given in respect to returns to shareholders and in respect to fulfilling its investment obligations, and decided we would increase prices by inflation only.”

In addition to higher energy costs, the business dealt with sewage flooding after last summer’s intense storms. It expects to spend nearly twice as much on the problem as the £40m allowed for by Ofwat from 2005 to 2010. Mr Cuthbert refused to be drawn on market speculation earlier this year that the company is now a takeover target.

Assistant director at stockbrokers Brewin Dolphin Newcastle, Campbell Maclachlan, said: “Despite soaring energy costs, Northumbrian has posted a terrific performance.

“Some takeover premium may well be factored into the share price, but there is little in these figures to spook the market.”

He said any moves to take over the company would depend on the Ontario Pension Fund, which owns 26%. “Any possible bidder is likely to be attracted to the company’s steady cash generation, and though the Canadian Fund will be keen to capture a profit at some stage, these results support their decision to hold on,” he said.

“However, any further rise in the share price will surely re-ignite further takeover speculation.”

Northumbrian said it had met targets for reducing leakage and nearly completed work on a 10-mile trunk main to serve customers in Newcastle.

Shares finished 1% down at 335.75.

HOW FIGURES BREAK DOWN

Revenue

Profit before tax

Net debt

Ordinary dividends paid and proposed

Year to 31.3.2008

670.4m

170.3m

2,150.4m

12.7p

Year to 31.3.2007

633.5m

147.8m

2,079.6m

11.27p

Change

36.9m

22.5m

70.8m

0.80p

Change

5.8%

15.2%

3.4%

7.1%