Pennon pleased investors yesterday when the water, sewerage and waste group disclosed plans to lift its dividend by a greater-than-expected 4 per cent a year in spite of a harsher regulatory regime.
But to help deal with the consequences of Ofwat’s pricing restrictions, South West Water, from which Pennon derives more than 70 per cent of its profits, has told workers to become more flexible in their working practices.
Chris Loughlin, chief executive of South West Water, said the company had also renegotiated contracts with third-party suppliers, which include Balfour Beatty and May Gurney, in a further attempt to cut costs.
A strong contribution from Viridor, its waste management business, helped pre-tax profits at Pennon rise from £159.4m to £183.8m in the year to the end of March on sales of £1.07bn (£958.2m).
Underlying profits at the water and sewerage operation rose 8.7 per cent while those at Viridor were up by more than a third.
South West Water was able to increase household bill prices by an average 7 per cent a year during the previous regulatory period but since the start of April the latest limits have taken effect, under which the company can increase prices by only 1.9 per cent.
In response to the restrictions, the industry has been looking for ways to cut costs. United Utilities, which along with Severn Trent has rebased downwards its dividend pay-outs, said last week that it had made its defined benefit pension schemes less generous to employees.
David Dupont, Pennon finance director, said it had the lowest financing costs in the industry after securing an average rate of about 3.65 per cent on £803m of fixed-rate debt.
Earnings per share were 39.9p (25.8p). A final dividend of 15.6p brings the total for the year to 22.55p, a rise of 7.4 per cent.
* FT Comment
Shares in Pennon rallied last year as those in other water companies came under selling pressure. Although the regulatory framework heralds a tougher five years ahead , at least South West Water has not been forced to cut its bills. However, since the turn of the year the shares have been the worst performing in the sector, off more than 6 per cent. That has left them yielding 4.7 per cent and trading at a slight discount to regulatory asset value, but at almost 15 times forecast earnings of 34p. The premium to peers is justified by the contribution of the cyclical Viridor. Pennon’s new dividend strategy, which helped the shares rise 10p to 499½p yesterday, largely reflects management confidence that the waste business stands to benefit from the government’s drive for recycling and renewable energy.
source: ft.com
