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Water companies bob higher in spite of move by water regulator to change 2019 price review methodology

Published: 12:33 03 Jul 2018 BST

Water
She added: “This is an important step in making sure water companies put customers' interests and those of future generations, at the heart of all the decisions they take"

Shares in water companies bobbed higher on Tuesday, going with the flow as stock markets rallied, in spite of a move by water regulator, Ofwat to make changes to its 2019 price review methodology.

In a statement, Ofwat said water companies will now be required to set out their proposals to share benefits with customers in companies that have gearing above the notional level, and explain how dividend policies in the years 2020 to 2025 will deliver for customers during the price control period.

READ: Pennon sees full-year profit, dividend rise, positive on outlook for water and waste

In addition, the regulator said, companies will also have to explain how performance-related executive pay will reward stretching delivery for customers.

Ofwat chief executive, Rachel Fletcher said: "Through the measures we've announced today, we are strengthening the incentive on companies to improve their performance for customers and cutting the rewards that come from financial engineering.

“This is an important step in making sure water companies put customers' interests and those of future generations, at the heart of all the decisions they take."

Income stream called into question

Russ Mould, investment director at AJ Bell commented: “Utility companies have historically been attractive investments because of their generous dividends.

“That income stream is now being called into question after regulator Ofwat called on the sector to be more transparent about how directors and shareholders are rewarded versus how customers benefit from their services.

He said: “Companies like United Utilities, Pennon and Severn Trent will have to explain in their business plans how dividends, the use of debt and executive pay can be justified when looking at how they intend to deliver high levels of efficiency and service to customers.

Mould concluded: “The latest announcement will raise existing concerns that water companies will have to scale back their dividends in the future and thus certain utility companies may become less popular for income-hungry investors.”

However, the water stocks still remained in demand at lunchtime, with Pennon PLC (LON:PNN) seeing its shares added 0.4% at 796.2p, while United Utilities PLC gained 1.3% at 772.6p, and Severn Trent PLC (LON:SVT) rise by 1.8% to 2,011p.

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