Water company Severn Trent hit the headlines (or should that be the ley lines?) earlier this week when it emerged that its engineers still used ancient divining, or “dowsing”, rods to find underground pipes – despite widely held scientific opinion that they don’t actually work. And, this morning, Severn Trent investors will be trying to divine the likely outcome of an upcoming regulatory price review – despite widely held opinion that these don’t work, either, writes Matthew Vincent.

A Financial Times editorial recently concluded: “the hurdles [the regulator] has set — above which the utilities keep the winnings — have proved too easy to clear”.

Severn Trent has provided some evidence for this notion in its half-year results. It said its so-called “outcome delivery incentives” – financial rewards or penalties based on performance against targets – are now on track to deliver a net £50m for 2017/18.In July, it had forecast that ODIs were on track for a target of £23m.

Analysts at Deutsche Bank had earlier suggested that this uplift would basically be due to favourable weather conditions. Severn Trent as much as confirmed it – attributing the ODI improvement to a 38 per cent reduction in internal sewer floodings and a 50 per cent reduction in external floodings. It also reported £770m of efficiencies, with a further £50m during the first half.

Deutsche’s analysts had also forecast a 6 per cent increase in earnings per share in the full-year, to 66.0p – which Severn Trent essentially achieved, posting underlying EPS of 65.9p. And they pencilled in a 7 per cent increase in dividends – a focus for critics of privatised water companies – to 34.9p, in-line with a policy to target RPI plus 4 percentage points each year through to 2020. Severn Trent said it would increase the interim dividend by a little less: by 6.2 per cent, to 34.63p.

Still, at least Severn Trent customers have the lowest bills: averaging less than £1 per day, and some £32 a year less than the next cheapest water company in England and Wales.

So does this mean the regulator will look kindly on Severn Trent?

Analysts at RBC think it might. They recently identified Severn Trent, Pennon and United Utilities as being “aligned with Ofwat’s agenda” – which meant their long-term dividends should prove sustainable. In fact, RBC suggested regulatory risks had been overpriced. While the 2019 price review will cut guaranteed returns and “weed out companies whose inefficiencies and profit-taking hurt customer interests” RBC concluded that the regulator “doesn’t have an agenda to dry out investor profits”.

Perhaps someone had been reading the dowsing rods wrongly.

Thames Water, however, has read the dowsing rods, and the FT editorials, and decided it cannot go on taking big dividends and using offshore tax havens while springing so many leaks. This morning, it has appointed Ian Marchant, former chief executive of utility company SSE and current chair of the engineering services company, John Wood Group, as a new independent chairman – and his job will be to lead “a review of Thames Water’s corporate structure and governance”. It is much needed. The FT recently noted that “When Thames Water spilled billions of litres of excrement into public waterways in 2013, its chief executive was not sacked. He later received a 60 per cent pay rise, to £2m.”

Mr Marchant’s aim will be to make future governance “as simple and transparent as possible for its customers and stakeholders”. And it doesn’t take a dowser to divine that this also means closing Thames Water’s Cayman Islands’ subsidiaries. Before Mr Marchant even gets started, the company has decided they “no longer serve their original purpose of enabling smoother access to the global bond markets”. In other words, they serve to look terrible to politicians and the public – and focus criticism on the priorities of Thames Water’s previous owners, Macquarie, in particular.

But Mr Marchant’s biggest job will be fixing Thames Water’s disconnect: not that between its pipes, but between its boardroom, its staff and its customers.

He said:

“We will conduct a thorough review…to ensure that we have the right mix of skills and experience needed in this rapidly changing world, have simple and transparent structures and importantly that we put customers at the heart of everything we do.”

Meanwhile, another utility, British Gas owner Centrica, has also tried to address concerns over its dividend: shareholder concerns that it won’t be high enough. With the government considering energy price caps, the group has said “for a period of time” it would be “willing to operate with dividend cover from earnings below historic levels”, as it seeks to increase profits from other areas.

Centrica’s reassurance for shareholders comes after a “disappointing” second half to the year, with the company losing a further 823,000 domestic energy customers between the end of June and October. This followed a decision by British Gas in September to raise standard electricity prices by 12.5 per cent.

And, finally, the Opening Quote Ashes update.

First Test, Brisbane: England first innings 196-4 (80.3 overs, stumps Day One)

Prevailing sentiment: Relief we weren’t 30-3 for the fifth match in a row.

FT Opening Quote, with commentary by Matthew Vincent, is your early Square Mile briefing. You can sign up for the full newsletter here.

Beyond the Square Mile

Britain’s car plants will produce fewer vehicles than expected this year, in a “worrying” development for a sector already suffering falling car sales at home and a public backlash against diesel vehicles. The expected output from the UK’s car factories was downgraded on Thursday after weak domestic demand dragged down production. The number of cars made in the first ten months of the year fell 1.6 per cent to 1,439,475, according to figures from the Society of Motor Manufacturers and Traders published on Thursday.

ThyssenKrupp, the German steel and capital goods producer, beat full-year forecasts, thanks to a recovery in material services and earnings growth in its components and elevator technology units. The group said adjusted earnings before interest and taxes rose 30 per cent to €1.91bn in the year, easily outpacing forecasts of €1.73bn, according to a Reuters poll.

Asia Pacific equities were mixed on Thursday with Hong Kong’s Hang Seng edging down 0.1 per cent while Australia’s S&P/ASX 200 was flat. Mainland Chinese stocks fell with the Shenzhen Composite index 1.8 per cent lower while the Shanghai Composite dipped 1.2 per cent. Japanese markets were closed for a public holiday.

Wall Street ended the day mixed. For a second consecutive day, the S&P 500 breached 2,600 but failed to close above that level ending the day 0.1 per cent lower at 2,597.08. The benchmark index was led by a 1.7 per cent rally in telecoms that was partially offset by a 0.4 per cent slide in both the financials and real estate sectors.

The dollar was holding steady in Asia after falling 0.8 per cent in the previous session following the release of the Federal Reserve’s latest policy meeting minutes. Policymakers signalled another increase in the Fed’s target range would probably be needed “in the near term” if the economy stays on track. However, that was not a unanimous view.

Markets at 0812 GMT

Asian markets
Nikkei 225 up +106.67 (+0.48%) at 22,523
Topix up +5.95 (+0.34%) at 1,777
Hang Seng down -303.32 (-1.01%) at 29,700

US markets
S&P 500 down -1.95 (-0.08%) at 2,597
DJIA down -64.65 (-0.27%) at 23,526
Nasdaq up +4.88 (+0.07%) at 6,867

European markets
Eurofirst 300 down -3.81 (-0.25%) at 1,522
FTSE100 up +7.68 (+0.10%) at 7,419
CAC 40 unchanged 0.00 (0.00%) at 5,353
Dax unchanged 0.00 (0.00%) at 13,015

€/$ 1.18 (1.18)
$/¥ 111.16 (111.20)
£/$ 1.33 (1.33)
€/£ 0.8887 (0.8868)

Commodities ($)
Brent Crude (ICE) down -0.21 at 63.11
Light Crude (Nymex) down -0.21 at 57.81
100 Oz Gold (Comex) up +1.80 at 1,292
Copper (Comex) up +0.02 at 3.13

10-year government bond yields (%)
US 2.32%
Germany 0.35%

CDS (closing levels)
Markit iTraxx Europe -0.85bps at 48.95bp
Markit iTraxx Xover -1.78bps at 238.59bp
Markit CDX IG -0.59bps at 52.5bp

Sources: FT, Bloomberg, Markit

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