Pennon profits up despite tougher price controls

Pennon Group has outperformed market expectations for its 2015/16 financial results, reporting a marginal increase in profit thanks to growth in energy recovery facilities in its waste business, Viridor.

The group reported profit before tax of £211.3 million for financial year 2015/16, up from £210.7 million in 2014/15.

Group chief executive Chris Loughlin told Utility Week this was because the group had been able to mitigate its revenue reset through its “continued focus on efficiency”, bringing Bournemouth Water online, and strong performance out of its waste business Viridor.

Eight out of 11 committed Viridor energy recovery facilities are now operational, and this is expected to rise to nine in 2016/17. As a result, profit before tax at Viridor rose 10.8 per cent to £30.7 million (2014/15: £27.7 million).

Pennon said energy recovery facilities are on track to contribute around £100 million to EBITDA in 2016/17, despite removal of Levy Exemption Certificates and lower energy prices. Whitman Howard analyst Angelos Anastasiou said this target seemed “eminently achievable”.

Both of Pennon’s water businesses recorded “strong performances” against their new K6 regulatory contracts, outperforming regulatory assumptions.

Profit before tax in the water businesses was down by £2.2 million to £165.7 million (2014/15: £167.9 million) reflecting South West Water’s revenue reset, but largely offset by the additional earnings from Bournemouth Water.

The group reiterated further cost-saving and synergy plans which are underway to deliver £11 million a year of savings by 2017/18.

It also outlined preparations being made to “maximise the opportunities” presented by the opening of the non-household retail market in 2017.

Previously announced Pennon Water Services will provide retail and water management services to its 85,000 existing non-household customers, and Pennon said it plans to grow its share of the non-household customer base by focussing on existing customer relationships through Viridor.

Pennon Group chief executive Chris Loughlin said in a statement: “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 per cent growth per annum above RPI inflation to 2020.”