Profits dry up at Pennon as rising costs hurt South West Water group

The company is the Jekyll and Hyde of the ten regional monopolies privatised in 1989. While it is regularly praised by the industry regulator Ofwat for its financial discipline, its environmental record has been branded the worst in the country by the Environment Agency, which has said South West Water “drags down the whole sector’s reputation”. The agency has called its performance “consistently unacceptable”.

Robert Lea www.thetimes.co.uk 

The inflation crisis will blow a £60 million hole in the operating costs of the South West Water group this year, putting further pressure on already falling profits.

Revenues at Pennon increased last year as second-homers and others flocked to the southwest to escape the pandemic in cities. But its underlying profits tumbled more than 8 per cent, hit by rising energy costs and the impact of rising inflation on index-linked borrowing.

The company’s finance director, Paul Boote, said there would be more trouble to come, with the likely increases in gas and electricity prices sending its energy costs up by £30-£40 million. The cost of servicing its inflation-linked debt will rise by another £30 million. Boote said those rising costs would be partly offset by a full year of income from its newly acquired neighbour, Bristol Water.

Pennon is the FTSE 250 parent company of the water supplier for Devon and Cornwall and parts of Somerset and Dorset. South West Water has the most expensive average water bills in the country at £522 this year, which it blames on having to look after a third of the UK’s bathing waters but with just 3 per cent of the country’s population, meaning it spends a disproportionate amount of money on its sewage treatment works, mains supply and sewerage pipes.

The company is the Jekyll and Hyde of the ten regional monopolies privatised in 1989. While it is regularly praised by the industry regulator Ofwat for its financial discipline, its environmental record has been branded the worst in the country by the Environment Agency, which has said South West Water “drags down the whole sector’s reputation”. The agency has called its performance “consistently unacceptable”.

In Pennon’s financial results for the year to the end of March, underlying revenues increased by 6.7 per cent, and including Bristol Water rose from £644 million to £792 million. “The Covid-19 pandemic led to a substantial population increase in the southwest with continued higher levels of household demand,” it said.

Excluding the impact of the acquisition of Bristol Water, Pennon admitted its underlying profit before tax fell to £143.5 million compared with £157 million in the previous year. It blamed “cost pressures from macro-economic conditions and higher costs” including energy, labour and chemicals and “increased interest charges on index-linked debt driven by the high inflationary environment”.

Pennon’s net interest costs of £77.9 million last year were £20.2 million higher due to the impact of inflation on index-linked debt. Susan Davy, the group’s chief executive, described it as “another year of resilient performance”.

Despite falling profits, the company is increasing its dividend by 8.2 per cent to 38.53p. Shares in the group have been dribbling down since last summer, off about 25 per cent during that time, and slipped further yesterday, down 2.7 per cent, or 28p, at £10.01.

 

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