Profits at Pennon Group, owners of South West Water, rose 1.6% to £210.7 million in 2014/15 (£207.3 million in 2013/14), accompanied by a 4.9% in shareholder dividends, according to its Annual Report for 2014/15 published this morning.

In December 2014 Ofwat confirmed  ‘enhanced’ status for South West Water’s AMP6 Business Plan – the Group now expects this to lead to a “tangible financial benefit” for Pennon. The Report says key projects have been accelerated and there is an opportunity to achieve the highest potential returns on equity in the sector.

In March 2015 the Board announced a continuation of its dividend policy of year-on-year growth of 4% above RPI inflation until 2019/20, amounting to a policy for 10 consecutive years (2010-2020) of 4% real dividend growth to shareholders.

In April 2015 Pennon acquired Bournemouth Water, a top performing water company which is sees as an excellent fit with South West Water, with the acquisition providing an opportunity to expand South West Water’s wholesale capabilities. According to Pennon, the combined business will provide an enhanced platform for innovation and growth ahead of market liberalisation. Cash resources used for the Bournemouth Water acquisition were replenished through an equity placing raising £100.3 million.

Commenting on business performance, South West Water Chief Executive Chris Loughlin said that as anticipated South West Water’s revenue for 2014/15 was impacted by the tariff freeze announced last year. However good cost control, the continued delivery of cost efficiency and lower financing costs had resulted in an increase of £5.4 million in profit before tax and exceptional items to £167.9 million, he said.

Customers switching from unmeasured to metered or assessed charges had also reduced revenue by £4.8 million - 79% of South West Water’s customers are now metered.

Cost efficiencies are being achieved through South West Water’s ongoing improvement programmes with specific initiatives this year in the areas of:

• asset investments and improvements supporting the PUROS programme – now finalised
• energy procurement and usage – continued energy efficiency schemes alongside additional power generation through renewable sources
• restructuring of defined benefit pension schemes
• right-sourcing and innovative contracting – tendering to achieve the ‘right price’ including in-sourcing and renewed AMP6 key and strategic contracts.
• safeguarding high quality drinking water through the completion of upgrades at two key water treatment works
• upgrades at wastewater sites to improve compliance
• innovative investments to reduce the number of customers’ properties previously highlighted as at risk from flooding.
• further investment to improve wastewater treatment compliance and safeguard bathing water quality
• ongoing improvements in customer service
• rigorous cost control and outperformance with the highest potential Return on Regulated Equity (RoRE) in the sector
• preparation for the opening of the non-household retail market in 2017 – this includes governance, structural and process changes to ensure compliance with the new market code
• continuing to ensure robust and transparent assurance.

Capital expenditure in the year was broadly in line with last year at £145.1 million (2013/14 £141.6 million) - a key element of the programme was the acceleration of AMP6 projects into 2014/15,  including preparatory expenditure on the innovative new water treatment works for Plymouth.

The focus for the final year of the AMP5 programme was weighted towards the maintenance of existing assets, increasing infrastructure resilience and delivering environmental improvements. Investments during the year included:

Significant capital schemes completed during the year included the combined £14.5 million of investment in water quality improvements at the water treatment works of Restormel and Wendron and the installation of ultraviolet treatment at Avon water treatment works in Devon. South West Water also completed a £10 million ‘grouting’ scheme at Wimbleball Dam as part of its reservoirs maintenance investment.  

On leakage control, the amount of water lost through leaks and bursts during 2014/15 remained in line with South West Water’s target of 84 megalitres or less on average per day. In addition to improving response times to any network issues, the company has been focusing on improving its water pressure management capabilities and using advanced diagnostic tools to help pre-empt any problems.

The water company is also targeting improved leak detection and increasing its use of innovative technologies in the field, while additional training for staff is also helping to deliver improvements.

Focus on improving maintenance schedules and procedures in 2014/15

During the past year South West Water has focused on improving its maintenance schedules and procedures while using advanced technologies to improve its capabilities for wastewater network monitoring and analytics.

In AMP6 the company is planning to carry out further investment in its wastewater treatment processes, pumping stations and network monitoring. This is expected to be complemented by ‘Downstream Thinking’ – a programme of work currently being piloted in which wastewater issues in urban areas are tackled through a combination of ‘soft’ engineering and sustainable techniques.

On flooding, South West Water is continuing to invest in increased sewer capacity, the separation of storm water from the wastewater from properties and other capital schemes to help prevent sewer flooding. In 2014/15 the company completed a £3.5 million scheme to upgrade the sewerage network in Truro, Cornwall, and a jointly-funded £2 million flood alleviation scheme to protect homes in the Colebrook area of Plymouth.

On energy and carbon, overall energy use for 2014/15 at 260.68 GWh was marginally lower than the previous year (2013/14 264.5 GWh) despite the drier than average summer in 2014 which increased the need for energy-intensive water pumping.

However, although South West Water recorded a reduction in its energy usage, the company’s carbon emissions rose between 2013/14 and 2014/15. This was largely as a result of an increase in the Government’s electricity grid average emissions conversion factor which is used to calculate emissions from electricity usage.

The company’s new water treatment works for Plymouth will use less energy and chemicals than its traditional counterparts, achieved through the use of cutting edge treatment technologies that were piloted during AMP5.

Renewable energy usage during 2014/15 was 18.5 GWh, an improvement on the company’s output from the previous year (2013/14 17.4 GWh). A number of renewable energy installations were taken offline for essential maintenance during 2014/15. The improvements made to these sites, along with investment in new installations, means the company is now able to generate 25 GWh – around 10% of its annual energy needs. South West Water is also building links with a number of third party renewable energy providers in order to increase the proportion of energy it draws from renewable sources.

Commenting in the Annual Report, Pennon Group Chairman Key Harvey, who is shortly stepping down, said:

“Our priority continues to be the creation of shareholder value through our strategic focus on water and wastewater services, and recycling, renewable energy and resource management.”

“With South West Water’s track record of efficiency and outperformance, the company has a strong foundation to deliver its business plan and will have an opportunity to outperform the assumed returns on equity. In addition South West Water is well prepared for, and supportive of, industry reform.”