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Water giants Severn Trent and United Utilities (UU) are set to be hit so hard by this week's Ofwat price review that they will have to slash their dividends by a fifth.
That's the conclusion of Goldman Sachs which is predicting that new tough price caps will mean UU — the company behind North West Water which is currently struggling with the floods in Cumbria and northern Lancashire — may also have to go to the City to raise funds in a rights issue.
On Thursday, regulator Ofwat sets down its final ruling on what the nation's regional and local water companies can charge their customers.
UU told the regulator it needs to charge its customers on average £404 a year by 2014. Ofwat told the company this was way over the odds and has said in an initial draft ruling that the figure should instead be 11% lower at £359.
Severn Trent, which has had its own major flooding problems during recent years and was involved in a major scandal in which it was found guilty of lying to Ofwat on more than one occasion, wants to raise its bills to £318 a year.
However, Ofwat has told the Midlands water company that it should in fact charge 12% less or £281.
Utilities analyst Fred Barasi at Goldman Sachs said: “If the final determination is close to the draft as we expect, both United Utilities and Severn Trent will likely need to cut their dividends 20%. Furthermore, we believe that UU will need to raise capital either via a rights issue or a sale of non-core assets, which would result in a greater earnings shortfall and potentially a greater dividend cut.”
That process of sell-offs appears to have already started at UU.
In the last month chief executive Philip Green has sold UU's stake in Northern Gas Networks for £85 million and its holding in the Manila Water Company for $73 million (£44 million).
The new Ofwat price caps have been weighing on the stocks of the industry's last remaining listed privatised water companies which have historically been seen as a safe haven with reliable dividend pay-outs.
In a rising market this year, UU shares are down more than 25% while Severn Trent's stock has fallen 20%.
