ANGLIAN Water which serves the driest part of the British Isles opened the floodgates for shareholder prosperity yesterday.

It raised profits before tax by 4.2% to #268m before exceptional items while the full year dividend has leapt 13% to 39p with a final of 27.5p.

Shareholders will benefit from the proposed 8% return of the company's capital in August.

This is to maintain balance sheet efficiency as Anglian has some 13.6 million warrants to subscribe for Ordinary shares outstanding which will increase the share capital by 5%. The net effect will be to return #150m or so to shareholders.

The Huntingdon-based group is setting a cracking pace for the other companies to follow as it is generally reckoned to be the most efficient of the sector and has less to fear than most from the regulatory review with Ofwat director-general Ian Byatt due to issue a paper this autumn outlining the sector issues.

The final decision will be taken in November 1999, so the market will be shrouded in uncertainty until then with a further unknown being the Government's real policy as to how it wants the water companies to be treated.

One crucial factor is the degree of flexibility to which companies can increase prices depending upon the quality of their service. That is currently restricted to just a half-percentage point above or below the fixed prices, but Anglian chairman Robin Gourlay argues that the premium for better service should be much higher.

The company was first for water and sewerage quality in 1996-97 and for performance improvement since 1992 - it rejoices in having a 100% clearance of the European mandatory standards for its 38 designated bathing beaches and is currently unique in that respect.

The capital expenditure programme last year rose #22m to #372m with a large chunk going on leakage control which has been reduced to 12.4%. The company is pushing hard on persuading customers to use meters which has helped reduce domestic water bills by 9.6% in real terms since the last review compared with the industry average of 4.5%, and the rise in sewerage charges has also been better than its peer group.

The international business continued in loss at around the previous year's level at #7.4m although the objective is for a positive contribution in 2000.

David Campbell, at Greig Middleton, said that the service quality matter is crucial for the investment prospects of the sector. If companies can be rewarded for quality, then the industry will continue to grow. He remains a buyer of the stock and is looking for a similar 13% dividend rise in the current year which with Anglian shares at 865.5p would raise the yield from 5.6% to 6.3%.