Severn Trent invokes poor economy for raising prices

Historically high household bad debts, falling consumption and dramatically changing weather patterns threatening supply and causing flooding are all reasons for not cutting water bills, Britain's largest quoted water company has said.

Regulator Ofwat will unveil its industry price caps on Thursday.

Severn Trent wanted a 4% rise in water bills over the next five years. Ofwat has signalled it believes the Midland water giant should cut bills by 8% to an average of £281 a year — the lowest in the country.

While that is good news for households, analysts say it will mean a 20% cut in dividends for shareholders. That has spooked the stock — traditionally a safe haven for investors — into a 25% share-price fall this year while the rest of the market has risen.

"What we have said is that we have a large capital investment programme to maintain our network, to provide security of supply and to prevent sewer flooding," said chief executive Tony Wray who declined detailed comment ahead of Ofwat's final determination. Finance director Mike McKeon added: "We have seen a rapid decline in consumption reflecting the general economic climate. In our region we have seen 7000 insolvencies in the last six months — as many as for the whole of the previous 12 months. Bad debts are running at 2.3% against a figure in the past of between of around 1.8%."

Severn Trent said today it will pay a 26.71p interim dividend, up 1.6%, for the six months to the end of September which will be paid regardless of Ofwat's new price caps. Increased prices this year meant Severn Trent profits leapt 21% to £188 million in the half year.