Shares in UK water utility Severn Trent are on the move, up 1.46% at 2,089 pence, as the company reported an 8% decline in pretax profit to £302.4 million because of the preparations of its bioresoures unit. Shares in utility companies are traditionally slow moving and never particularly promising in terms of gains but Severn Trent makes up for that with being a reliable payer of dividend. The company said its final dividend pay-out will be 51.92 pence a share this year, up from 48.90 pence a share in 2017.
Severn Trent and the sludge market
Unlike power utilities which gain and lose customers fairly quickly to cheaper competition, water utilities have a much more solid customer base and their income changes relatively little from year to year, droughts and extreme weather permitting. But there are several things to look out for with Severn Trent in the next few years.
The UK economic regulator Ofwat is working to introduce a market for bioresources – or sludge, to you and me – from April 2020, and as part of that it will bring in a binding price control for the biowaste. The idea behind Ofwat’s move is to push companies to use the sludge in a productive way, for instance to produce electricity or to buy and sell in order to generate additional cash.
Severn Trent, which operates in a similar way to the Chinese economy – that is, on a five year basis – has started preparing for the changes and plans on spending £100 million in its next asset management period from 2020 to 2050. Severn Trent has already started making financial investments in the project and has said that this has caused some of the 8% decline in its full year pretax profit. Not much is known at this stage about how the sludge market will work but the details will be worked out closer to the introduction of the market in 2020.
On a political note
Severn Trent shares were hit earlier this spring on speculation that if Labour came into power it would opt to privatise the company. While this was good to create some short-term activity in the stock the story is fairly far-fetched given that the next UK election date is 22 May 2022 (despite rumours this week of a snap election). Given the state of UK politics the winner of that election is anybody’s guess and if Labour theoretically got into power privatisation, another big if, is more likely to start with railways, giving utilities a few more years of status quo.