Pennon Group, owners of South West Water and sister waste management company Viridor, has announced its preliminary results for the year ended 31 March 2014.

Group revenues were up by 10.0% to £1,321m, while profit before tax was up 9.1% to £207.3m. Commenting on the results, Joshua Raymond Chief Market Strategist of cityindex.co.uk₁ said:

 “Pennon Group today announced a 9.1% growth in full year pre-tax profits to £207.3m thanks to tariff increases and growth of new customers at South West Water. The results are positive for the stock and sentiment in general, with the firms profit coming in above market expectations. The increase full year dividend by 6.5% to 30.31p was pleasing to see but fully expected. The results gave wind to Pennon’s shares this morning, which rose more than 2% against a backdrop of a generally weaker London market on Tuesday.”

South West Water profits rose 10.8% to £162.5m, however, Viridor saw profits plummet down 19.5% to £27.6m.

Pennon said South West Water had delivered a strong performance against the AMP5 2010 – 2015 regulatory contract. In April the water company achieved ‘enhanced’ status for its AMP6 Business Plan for 2015-2020 – the only company to achieve Ofwat’s top assessment.

Despite the extreme weather during the year – a hot dry summer followed by storms over the winter – South West Water continued to deliver good operational performance against the 2010-2015 contract alongside further improvements to customer service. This was reflected in strong financial results – the result of revenue growth, good cost control and continued efficiency delivery.

Pennon said the early Draft Determination had put South West Water in a strong position, allowing accelerated delivery of key projects. South West Water’s track record in delivering efficiency and outperformance also provided a strong platform for implementing the plan with the potential to enhance returns on equity.

Operating profit at the water company increased by £12.2m (5.7%) to £227m, while revenue increased 4.3% to £520m as a result of tariff increases, new connections and higher other sales. This was offset by an overall reduction in demand and the effects of customers switching to a metered tariff - 6,000 new customer connections contributed £3.7m of additional revenue, while 10,100 customers switching from unmeasured to metered charging or assessed charges reduced revenue by £6.5m.

Capital expenditure in the year increased to £141.6m (£116.5m in 2012/13) driven by key quality schemes and the delivery of additional capacity to meet future growth.

Investments during the year included:

• Improvements in water quality with treatment upgrades at two key sites including Restormel which provides 50% of the water for Cornwall
• Investments in assets to improve bathing water quality to meet revised European Guidelines in 2015
• Delivering additional capacity to meet growth – including supply to two new towns within the region
• Focusing on compliance at waste water sites to manage periods of extreme weather conditions
• Safeguarding water resources – upgrades to four reservoirs across the region
• Innovative investments to reduce flooding for those customers previously highlighted as at risk.
• Operational ways of working – integration of customer services management and asset improvements through the PUROS programme
• Energy procurement and usage – energy efficiency schemes alongside additional power generation through renewable sources
• Rationalising administration and support services
• Right-sourcing and innovative contracting – tendering to achieve the ‘right price’.
• Upgrading assets in key bathing waters by accelerating capital investment
• Maintaining and enhancing customers private sewers since October 2011
• Tackling customer affordability through debt initiatives.

Annual operating costs were £22.2m lower, with £3.6m cost savings delivered in 2013/14 – attributed to South West Water’s ongoing improvement programmes. South West Water once again shared the benefits of financial outperformance, with an additional £60m invested during the period to improve services to customers.

The ‘Pure Water, Pure Service, Pure Environment’ strategy is the cornerstone of South West Water’s operations, targeting robust operational performance and high standards of customer service.

On Pure Water,  a significant proportion of the company’s capital programme is focused on maintaining drinking water quality including an upgrade to its largest water treatment works – Restormel – which provides water to 50% of customers in Cornwall. Work is also continuing on South West Water’s ‘Upstream Thinking’ catchment management programme.

Under its Pure Service initiative, South West Water is one of the few companies to have successfully introduced a social tariff ‘WaterCare’ during 2013/14 which has already assisted 1,100 customers in the region. 

In other areas, the utility has maintained its investment in renewable energy, bringing the total expenditure for AMP5 to over £4m. Solar energy represents a significant proportion of the spend, delivering over one million kilowatt hours of solar energy generated last year. Future plans include further improvements and investments targeted at reducing waste water pollution incidents and improving treatment compliance at waste water works – Pennon Group said  both of these “disappointingly fell short of the company’s targets this year.”

South West Water has opportunity to enhance equity returns in AMP6

The benefits received from the ‘enhanced’ assessment include an initial financial award of £11m reflected as an addition to the RCV with up to 50% reinvested; an enhanced Totex menu with an  14extra 5% enhanced sharing rate and a ‘do no harm’ principle – which ensures that enhanced companies that deliver their business plans should be better off overall than other companies. Ofwat also made no adjustments to South West Water’s planned AMP6 capital investment programme of £868m.

Pennon Group said that the company is confident that it can deliver the plan with its track record on outperformance and targeted outcome delivery, commenting:

“ There continues to be a challenging but deliverable opportunity for South West Water to outperform the business plan targets and enhance equity returns in K6 through the incentives regime in place. “

 Commenting on provisions in the new Water Act preparing the way for further retail and wholesale competition when the market opens in April 2017,  Pennon said South West Water was building on the success of its ‘Source for Business’ range of specialist advice and support measures and had been awarded supply licences covering Scotland, England and Wales, which will allow it to retail water to customers outside its current region.

Ken Harvey, Chairman commented:

 “This has been a year of significant achievements for the Group. South West Water is continuing its strong performance against the 2010-2015 regulatory contract and is well placed to outperform its assumptions. The company continues to deliver robust operational performance and improving standards of customer service, notwithstanding the dry summer of 2013 and then the extreme weather and resultant flooding of last winter.

I am delighted that the quality of South West Water’s Business Plan was such that it was awarded ‘enhanced’ status in the 2014 price review – the only water and sewerage company to achieve this. As a result we received our fast tracked Draft Determination for 2015-2020 on 30 April which will enable early implementation of key elements of the Business Plan."

 He added that financial performance at Viridor before exceptional items has been in line with management expectation and that operating contribution is slightly ahead of last year, notwithstanding the difficult trading conditions.

1: http://www.cityindex.co.uk/market-analysis/analysts/joshua-raymond/