'Northumbrian Water is a safe haven for battered investors'

STABILITY is a term which rarely sets pulses racing among stock market investors, but it is stability that makes Northumbrian Water shares appear an attractive proposition.

After a decade of price turbulence, international crises and high profile collapses such as Enron and the Internet trading bubble, the City is looking for certainties - or as near to it as possible - in the current economic climate.

Today's listing of Northumbrian Water opens up 519 million of the company's shares to the City's big investment houses, which are excluded from trading on the smaller Alternative Investment Market, where the company has been listed since May, when parent company Suez put 75 per cent of its stake up for sale.

Institutional investors, including the big pension funds, chastened by the losses sustained chasing profits on fluctuating stock prices, are likely to judge Northumbrian Water a safe bet.

Operating in a regulated utilities market with sound management, it offers a solid investment opportunity with a November dividend on track to reach a return of seven-and-a-half to eight per cent.

Northumbrian Water's finance director Chris Green said: "It's a safe haven for investors' money in terms of generating a reasonable return in terms of dividend, and the utilities as a sector are themselves a safe haven compared to other industries."

Stability also appears to be the watchword at Northumbrian Water's headquarters at Pity Me, on the outskirts of Durham City.

The firm has seen tremendous change, beginning with privatisation in 1989, through mergers and acquisitions and, for the past eight years, in the hands of French owners - firstly Lyonnaise des Eaux and subsequently Suez Group.

Uncertainty has hung over Northumbrian's head for the past year - which made it a difficult time for the company's 1,500-strong North-East workforce.

Recent acquisitions and a number of difficult contract positions, especially in Argentina, left Suez with mounting debts, which last year passed the 27bn euro mark.

The sale of Northumbrian afforded Suez the opportunity to wipe something in the order of 3bn euros of debt off its balance sheet - and a shortlist of three potential bidders was drawn up for the sale.

The senior management at Pity Me were relieved when the deal was finally done with a consortium of mainly British investors, advised by Deutsche Bank. Suez retained a 25 per cent stake in the business - allowing the French firm to keep an interest in the British utilities market - and essentially management of Northumbrian will continue as before.

The peculiar trading conditions that exist in the regulated water market dictated that even under Suez, the parent company had to adopt an arm's-length approach, with all decision making taking place in the UK, a position of independence for Northumbrian which will, if anything, be strengthened by the sell-off.

Mr Green said: "One of the frustrations of the bidding process was the uncertainty of not knowing what form of ownership we were going to end up with. Had it been one of the private equity houses that was successful, we didn't know how that would have changed the management philosophy of the group. I think the deal we have ended up with is probably the best possible for Northumbrian Water, in as much as there has been some change, but it also ends a lot of the uncertainty for the workforce.

"We were always a very autonomous company even within the Suez Group, because it was a regulated industry that demanded local boards make local decisions, not the parent company in Paris, so to that extent it will be business as usual.

"It's good for investors and it's good for everyone in the company. It removes the uncertainty, it offers a secure future and we are looking at introducing share schemes for employees so they can share in that success."

There are, however, some problems bubbling beneath the surface at Northumbrian Water.

As a result of the debts incurred in the change of ownership, the company's official credit rating has slipped from A- to BBB, which, along with significantly higher interest payments in the short term, makes further borrowing to finance the company's ambitious £900m investment programme less easy and more expensive.

"It's not where we want to be and its not where Ofwat wants us to be," said Mr Green.

It is the company's 4.3 million customers, 2.6 million of whom live in the North-East, who are likely to bear part of the burden.

Although there are several strategies to cut the level of debt, the most contentious is likely to be price rises for the consumer.

In its draft business plan released last month, the company asked regulator Ofwat for permission to increase prices by 37 per cent over five years from 2005 - an increase in average household bills from £206 to £286.

The company said price rises were necessary and come against a backdrop of regulator-enforced price cuts across the industry during the past four years of about 21 per cent. Water companies elsewhere in the country are asking for an average of 31 per cent increases.

But the timing will push the water industry back into the political arena - it looks likely that there will be a General Election within months of the charges coming into force in April 2005.

However unpalatable price rises may be, Mr Green says that a failure to invest in the maintenance of the nation's water supplies is equally unpalatable - and even raises the spectre of Railtrack and its failure to deliver improvements to the nation's rail network.

Mr Green said: "We argued for stable prices and felt that had the rise been more gradual then it would have been more palatable.

"At the end of the day, it is down to the regulator's judgement: there is going to be a price rise in 2005, but exactly how much is down to his discretion.

"However, the new investment and maintenance programme will need to be funded and I don't think cutbacks in maintenance are going to be acceptable to the public either."