Pennon Group, owners of South West Water and waste company Viridor, has announced its results for the half year ended 30 September 2014.

The Group said the results are in line with management expectations -  revenue is up 3.8% to £692.3m, while profits before tax are down £10.9m (9.8%) to £100.0m. South West Water’s profits dropped £1.1m to £86.2m, while Viridor’s fell £10.6m to £4.7m.

The water company’s revenue decreased by 0.3% to £268.3m as a result of the 2014/15 tariff freeze and the effects of customers switching to a metered tariff net of new connections and higher other sales. The Group said good operational cost control had ensured £2.5m of efficiencies to fully offset cost increases(including power and business rates) of £2.4m at SW Water.

The interim dividend of 9.98p per share represents an increase of 6.3%, in line with the previously announced policy to grow the Group dividend by 4% per annum above inflation up to the end of 2014/15. The Board will review the dividend policy for the AMP6 period following the Final Determination for South West Water and will make an announcement at the 2014/15 Preliminary Results.

South West Water’s early receipt of Ofwat’s Draft Determination on 30 April 2014 has allowed the company to implement accelerated delivery of key projects into 2014/15. These include asset enhancements to deliver bathing water quality improvements, preparatory expenditure for the innovative new water treatment works at North Plymouth and asset interventions focused on delivering compliance benefits.

South West Water’s business plan for AMP6 was assessed as ‘enhanced’ by Ofwat on 4 April 2014, the only water and sewerage company to achieve the top assessment.

Capital expenditure in the first half year of 2014/15 was £64.6m compared to £58.5m in the first half of 2013/14. Regulatory net capital expenditure was £68.9m, compared to £64.7m in the first half of 2013/14. The focus for the programme remains weighted towards the maintenance of existing assets, increasing infrastructure resilience and delivering environmental improvements.

Investments during the half year include:

• continued improvements to safeguard water quality with treatment upgrades at two key sites
• upgrades at wastewater treatment sites to improve compliance
• innovative investments to reduce the number of customers’ properties previously highlighted as at risk from flooding

The water company has seen a significant increase in treatment compliance at wastewater works, with current compliance at over 97%, compared to 92.5% for the year to March 2014. The number of pollution incidents has also fallen, with the number of Category 2 (significant) incidents falling to two in the first half of the year compared to eight over the same period last year.

Annual operating costs at the water company are £24.7m lower, with £2.5m cost savings delivered in the first half of 2014/15 (compared with £1.7m in the first half of 2013/14). Pennon said this is being achieved through South West Water’s ongoing improvement programmes with specific initiatives this year in the areas of:

• operational ways of working – finalised asset improvements through the PUROS programme
• energy procurement and usage – continuing energy efficiency schemes alongside additional power generation through renewable sources
• right-sourcing and innovative contracting – tendering to achieve the ‘right price’, including in-sourcing of key strategic contracts.

Pennon said the early Draft Determination had given South West Water greater certainty over the plans and expectations for the next five years, providing a strong platform for implementation and targeting enhanced equity returns.

Commenting on the results, Ken Harvey, Chairman said:

“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 efficiencies, and improving standards of customer service.”

“Half Year 2014/15 profits reflect the 2014/15 tariff freeze already announced. However, operating profits remain broadly stable and the revenues foregone are included in the Draft Determination for K6 (2015-2020) on an NPV neutral basis. Early receipt of Ofwat’s Draft Determination is allowing the accelerated delivery of key projects identified in the company’s business plan for K6. With South West Water’s track record of efficiency and outperformance, the company is well placed to deliver its business plan and will have an opportunity to outperform the assumed returns on equity.”