The upcoming Price Review in 2019 is likely to be “a relatively more prescriptive price review than PR14”, according to Pennon Group, owners of merged water company of South West Water and Bournemouth Water and Viridor Waste Group.

Commenting in its latest financial results for the half year ended 30 September 2017, Pennon said that PR19 would be a challenging Price Review but that South West Water is “well-placed” to respond and deliver outstanding services to customers.

Statutory profit before tax was up 26.8% to £129.8 million while statutory earnings per share rose 23.2% to 21.8p. Shareholders will receive an interim dividend per share of 11.97p – an increase of 7.9%. However, compared to last year to South West Water’s pre-tax profits for the first six months of the financial year saw only modest growth - up 0.3pc higher at £96.2m as it seeks to keep customer bills down. 

South West Water’s capital expenditure in the first half of the year rose to £97.6 million compared to £79.7 million in H1 2016/17, reflecting increased activity of some key large schemes from last year including:

• the innovative Mayflower Water Treatment Works at North Plymouth with c.£20 million of expenditure in H1 2017/18 (H1 2016/17 c.£9 million)
• investment in Plymouth Bathing Waters, delivering targeted improvement to maintain the high level of bathing water quality in that area
• improvements at three water treatment works including the installation of GAC filtration

Pennon sees consolidation as a sustainable way to deliver greater efficiency, lower bills and delivering benefits for customers. In the 18 months since the Bournemouth Water acquisition with c.£27 million of cumulative synergies targeted by 2020, £12 million have already been delivered through a 25% reduction in back office costs. Shared best practice is also delivering operational improvements across the combined business.

Factors driving savings include:

• continuing advantages from strategic alliances including a new water distribution framework and the H5O capital alliance in place since 2010
• continued efficiencies from the Bournemouth integration, including delivery of key capital schemes in the region
• ensuring efficient capital investment through the use of data analytics optimising capital and operating solutions and promoting efficient off-site build techniques
• utilising new technology and equipment to increase the resources needed to deliver wastewater improvement, real-time pressure management and network modelling targeting efficient interventions

Group revenue in H1 2017/18 increased by 5.6%  (£38.4 million) to £723.9 million. £22 million of the increase relates to non-household customer accounts, including the retail book acquired from South Staffordshire by Pennon Water Services, the new retail venture owned 80:20 with South Staffordshire.

Revenue from South West Water increased by 2.6% (£7.3 million) due to tariff increases (2.5%), customer demand increasing by 1.1%, from the drier weather and increased infrastructure connections.

Totex outperformance has already achieved cumulative savings of £159 million and financing outperformance has delivered £83 million in the first half of the K6 (2015-2020) regulatory period.

Pennon Water Services, an 80:20 venture with South Staffordshire Group, which provides water and wastewater services, is  one of only four associated retailers to have achieved net growth in the new competitive non-household market. Now serving over 160,000 customer accounts across 17 different wholesale regions, Pennon Water Services has achieved net growth of c.5,100 customer accounts, and has facilitated around seven per cent of all switches in the market.

Funding will also include sourcing alternative financing to EIB funding

Commenting on financing provisions, Pennon has signed £150 million of new and renewed facilities during the half year - £125 million in Pennon Group plc and £25 million in South West Water.

Following Government discussions with the European Investment Bank (EIB),  previous EIB approved transactions are being progressed. Pennon has cash and committed facilities covering the remainder of its planned AMP6 capital spend and Viridor ERF investment programme.

However, funding would also be sourced over AMP6 to maintain an appropriate headroom of cash and committed facilities, including replacing maturing finance and to prepare for the next regulatory period, which would also include sourcing alternative financing to EIB funding.

Leakage levels have halved since privatisation

Chris Loughlin, Pennon Chief Executive said:

“Pennon has delivered robust performance in the first half of 2017/18 across both water and waste activities. Our priority continues to be to provide an outstanding level of service to our customers and communities, while offering a sector-leading dividend policy for our shareholders. In water, our focus on cost savings means bills are lower now than they were 8 years ago, whilst at the same time we are continuing to invest significantly in our plants and distribution network. “

This means we have delivered significant improvements in clean water and bathing water quality and our leakage levels have halved since privatisation.”

South West Water was awarded enhanced status for its 2015-2020 Business Plan and has the highest potential returns in the water sector to 2020.

£6 billion to c.£9 billion estimated investment anticipated between 2020 to 2050

September 2017 saw the publication of the WaterFuture 2050 plan which sets out South West Water’s vision and strategy over the long term. Pennon anticipates that significant investment will be at least comparable to historic levels with c.£6 billion to c.£9 billion estimated investment required over the 30 years to 2050.

Key areas of investment are:

• Resilience
• Environmental protection and enhancement
• Security of supply
• Flood protection
• Transformational improvement to customer service

Principal risks include "evolving political views" on water industry nationalisation

One of the largest environmental infrastructure groups in the UK with assets of around £6.0 billion and a workforce of around 5,000 people, Pennon is at the top end of the FTSE 250.

Principal risks and uncertainties for the remaining six months of the financial year which could have a material adverse effect on the Group have been reconsidered against a back drop of potential wider uncertainties. These include the UK leaving the EU and the evolving political views on the nationalisation of the water industry and the associated influence on regulatory behaviour and news-flow. Pennon Group commented:

“Whilst a lack of clarity exists with respect to their potential direct and indirect impact, these uncertainties continue to be pro-actively monitored and managed by the Group at both a strategic and operational level.”