Pennon Group, owners of waste company Viridor, South West Water and Bournemouth Water has reported underlying profit before tax broadly in line with expectations at £211.3 million (2014/15 £210.7 million) - achieved against a backdrop of reduced allowed returns in the water business for the AMP6 2015-20 regulatory period.
With assets of around £5.7 billion and a workforce of over 4,800 people, Pennon, which is at the top end of the FTSE 250, has reported underlying performance in-line with management expectations with the publication today of its full year results for the year ended 31st March 2016.
The Group said the reduced returns, which had a net impact of £13.5 million, had been mitigated by strong contributions from Viridor’s growing portfolio of operational Energy Recovery Facilities and from Bournemouth Water following the acquisition.
Net synergies of £27m by 2020 from integration of South West Water and Bournemouth Water
South West Water was awarded enhanced status for its 2015-2020 Business Plan, and has the highest potential returns in the water sector. Bournemouth Water was acquired in April 2015 and has been substantially integrated into South West Water. Pennon is expecting to deliver around £27 million of net synergies by 2020 from the integration of South West Water and Bournemouth Water.
Both the water businesses recorded strong performances against their new AMP6 regulatory contracts, outperforming regulatory assumptions. The water business’s underlying profit before tax was marginally down by £2.2 million (1.3%) to £165.7 million (2014/15 £167.9 million) reflecting South West Water’s revenue reset, largely offset by the additional earnings from Bournemouth Water (acquired in April 2015), good cost control and lower average borrowing rates.
£56 million of Totex savings delivered in 2015/16
The combined water business is ‘front-end-loading’ efficiencies and savings to allow early and more certain delivery of outperformance. £56 million of Totex savings have been delivered in 2015/16, despite costs of delivering growth. Pennon said the Totex savings “reflect changes in the timing of delivery from those planned in each of the determinations.” The outperformance reflects base Totex efficiencies of c.13.8% per annum with further initiatives of c.0.4% per annum (c.£2 million per annum) being targeted.
Total operating costs for the water business were £211.8m for the year (£322.5m including depreciation), comprising £187.3m from South West Water and £24.5m from Bournemouth Water. This compares with South West Water costs in 2014/15 of £190.9m (£296.8 million including depreciation).
South West Water and Bournemouth Water capital expenditure was £134.1 million compared to £145.1 million for South West Water in 2014/15.
With the highest potential returns in the sector for AMP6, Pennon said South West Water is outperforming its business plan, resulting in a return on regulated equity of 11.7% for the water business.
Commenting on South West Water’s unique WaterShare framework as part of which performance against the business plan is reported to both shareholders and customers, Pennon said for 2015/16, WaterShare had realised £25.5 million for shareholders and £21.0 million for customers in respect of Totex efficiencies, with an additional £1.8 million of shareholder value created from ODI performance with enhanced services delivered for customers.
Non-household retail strategy includes capitalising on Viridor’s national footprint
Pennon Group said the combined business was “well-prepared” for Non-Household Retail market liberalisation - South West Water has had a separate customer service and contact centre for over ten years, giving the company an advantage in its preparation for market liberalisation in April 2017.
Ahead of the non-household retail market opening in April 2017, the Group has created a new single legally separate company, Pennon Water Services which will provide retail and water management services for around 85,000 non-household customers, who will be eligible for the new market.
The company will provide retail and water management services via its existing brands – South West Water Business Services, Source for Business, Avon Valley Water, Bournemouth Water Business Services and Aquacare.
The Group also said a key part of its non-household strategy would be to capitalise on Viridor’s national footprint, its commercial culture, order book, expertise and existing customer relationships, with a focus on exploring the opportunities to provide value-added services.
The Group has further cost saving and synergy plans underway to deliver c.£11 million a year of enduring financial benefits by 2017/18. At South West Water, this equates to c.£2 million a year of additional Totex outperformance over and above existing plans. At Viridor this equates to c.£9 million a year.
Focus on driving synergies and sharing best practice across the Group
Pennon said it is focused on driving greater synergies and savings across the Group, sharing best practice and ensuring it is well placed to capitalise on emerging opportunities – the report says:
“Both Viridor and South West Water have a breadth and depth of experience in managing large asset bases and in using engineering excellence, technology and innovation to deliver efficiency and effectiveness. By sharing knowledge across the Group and harnessing our combined skills we can provide even better services to our extensive customer base of local authorities, major corporate clients and household customers.”
As part of the evolution in Pennon’s structure, a shared services review is currently underway to assess where opportunities can be unlocked to create additional value through integrating back office functions, sharing skills and knowledge across Pennon’s businesses and reducing costs.
Combined water business is "front-end -loading" efficiencies
The combined water business is ‘front-end-loading’ efficiencies and savings to allow early and more certain delivery of outperformance. £56 million of Totex savings have been delivered in 2015/16, despite costs of delivering growth. Pennon said the Totex savings “reflect changes in the timing of delivery from those planned in each of the determinations.” The outperformance reflects base Totex efficiencies of c.13.8% per annum with further initiatives of c.0.4% per annum (c.£2 million per annum) being targeted.
Key areas of investment and activity at South West Water during 2015/16 included:
- Development expenditure for a new £60 million state-of-the-art North Plymouth water treatment works
- Detailed design of improved water treatment processes such as granular activated carbon (GAC) filtration and ultraviolet (UV) disinfection at five water treatment works across the region
South West Water also continued to work with organisations including the Environment Agency and local councils on flood alleviation projects. In 2015/16 this included the completion of a £2 million scheme to protect homes in the Colebrook area of Plymouth and support for the proposed Environment Agency and Cornwall Council-led £20 million flood alleviation and regeneration scheme around St Austell (for which a funding bid has been submitted to the EU). South West Water is also providing financial support for the Exeter Flood Defence Scheme.
Key areas of investment and activity at Bournemouth Water included:
- Mains replacement schemes and new mains development
- Water treatment upgrades including GAC replacement and the addition of UV treatment at three sites
- Improvements to the disinfection process at Alderney water treatment works.
Chris Loughlin - 2015/16 a transformative year for Pennon
Comenting on the results, Chris Loughlin, Pennon Group Chief Executive said:
“2015/16 has been a transformative year for Pennon. The Group has delivered a strong performance, notwithstanding the financial impact of our commitment to keep South West Water customer bills below inflation to 2020. We have seen significant earnings growth driven by the build-out of Energy Recovery Facilities across the UK. Bournemouth Water has now been integrated into South West Water and the combined water business is outperforming its regulatory contract. This strong performance across the Group underpins our sector-leading dividend policy of 4% growth per annum above RPI inflation to 2020.”