Pennon Group, owners of South West Water and waste management company Viridor, has announced its unaudited results for the year ended 31 March 2011. The Group said it was confident that South West Water would “outperform expectations in AMP5.

Profit before tax for the Group was up 1.5% to £188.5m, South West Water profits dipped by 0.5% while Viridor’s were up 14.2%.

Pennon said South West Water had made a strong start to the new 2010 – 2015 AMP5 regulatory contract and had delivered a “step change” in operating efficiency.

Commenting on the results, Ken Harvey, Chairman of Pennon Group, said:

“I am pleased to say that it has been another successful year for the Group. During the year South West Water continued to improve its operational performance and Viridor has once again delivered strong profit growth. Looking forward, South West Water is well placed to outperform the assumptions for the current regulatory period. Viridor’s long-term profit momentum is underpinned by its recycling business, its major Energy from Waste planning successes, and its strong PPP pipeline.”

Strong operational and finacial start to AMP5

At the end of AMP4, South West Water reported that it had a solid platform in place for continued success during the new AMP5 period and had already benefitted from a robust position to deliver a strong start both financially and operationally with improved standards of customer service.

Revenues rose 1.0% (£4.6m) to £448.8m as a result of tariff increases, new connections and higher demand offset by the effects of customers switching to a metered tariff and lower other sales. Approved tariff increases, including the 1.1% K factor, amounted to £7.0m.

Customers switching from unmeasured to metered charging reduced turnover by £6.9m, but 5,500 new customer connections contributed £2.1m of additional turnover - 71% of South West Water’s domestic customers are now metered. Customer demand was 1.3% higher than last year resulting from dry weather in the early part of the year.

South West Water’s operating profit decreased by £3.7m to £189.8m – attributed to the impact of the reduced rate of return allowed in the 2009 Ofwat price review.

Operating costs, including depreciation and restructuring costs, increased from £250.7m to £259.0m. Cost increases of £8.3m, additional costs from new capital schemes of £10.1m (including additional asset maintenance costs of £6.7m relating to the increased emphasis on maintenance in the 2010-2015 investment programme) were offset by £8.4m of efficiency savings, increased property disposals and reduced cost of other sales of £1.0m.

During AMP4 South West Water implemented a significant programme of organisational restructuring. The initiative is continuing into AMP5, delivering £4.0m in 2010/11. (2009/10 - £5.0m). A further £3m is expected to be provided in 2011/12.

Major investments during the year included construction on the Exeter water treatment works flood defence scheme, infrastructure works connecting Stannon Lake (the company’s fourth largest reservoir) into the distribution network, and maintenance expenditure focused on maintaining near perfect tap water quality.

Operational Highlights

South West Water’s company-wide ‘Pure Water, Pure Service, Pure Environment’ strategy is the cornerstone of the company’s business and operations. This year the company once again successfully met both its annual and three year rolling leakage targets, and has done so every year since leakage targets were originally set by Ofwat.

A significant proportion of the company’s capital programme in 2010/11 was focused on maintaining drinking water quality, which remained “near perfect” with a 99.97% sample compliance rate during the 2010 calendar year.

Investments made during the year included filtration improvements to a number of water treatment works, security enhancements at works, and refurbishment of the Lopwell raw water pumping station.

South West Water has also put in place a comprehensive strategy to ensure a continued secure supply of water for the region. 2010 was the 14th consecutive summer with no water restrictions and despite very dry conditions in the year to date the company envisages no water restrictions in summer 2011. The two disused china clay pits acquired in 2006 and 2008, now known as Park and Stannon Lakes, represent a significant addition to water resources in Cornwall.

Described as more cost effective than building new reservoirs, the new lakes will further increase the robustness of the company’s water supply system.. Park Lake became fully operational last year and Stannon Lake will follow this summer. The two lakes form the region’s fourth and fifth largest reservoirs (behind Roadford, Wimbleball and Colliford).

Plans for private sewers transfer under way

South West Water has put operational plans in place to manage the transfer of private sewers and lateral drains due to come into effect from 1 October 2011, with a procurement process with suppliers to deliver the service to customers already under way. The company said that related incremental operating and capital costs efficiently incurred would be funded by future adjustments to price limits.

Good progress on renewable energy

The company has met its combined energy volume reductions target of 3GWh and said it has also made good progress in the development of renewable energy systems, with major overhaul and control system replacements for its larger sewage gas combined heat and power plants, to give improved reliability and increased outputs. The company’s larger investment programme for new hydroelectric capacity has included a number of innovative cost effective solutions.

South West Water has also now purchased 94% of its AMP5 energy requirements at a lower market price than that assumed in Ofwat’s Final Determination.

Catchment management to improve raw water quality

South West Water has now embarked on an innovative programme of work called ‘Upstream Thinking’ to improve raw water quality in a sustainable way. The initiative - seen as best practice in the industry - seeks to improve the quality of water that feeds into treatment plants from the main moor sources of Dartmoor and Exmoor, by helping to re-establish the wetlands that naturally cleanse water by slowing the flows on their downhill journey to rivers and reservoirs.

The company said that receiving better quality water at the company’s plants would reduce the work required to cleanse it for human consumption, lower the quantities of chemicals the company has to use and increases the cost-effectiveness of its operations.

Efficiency

Pennon said South west Water had made a strong start towards achieving targeted operating cost reductions. The company is seeking to front-end load delivery of efficiencies of 2.8% per annum targeted for AMP5. Some £8.4m, equal to 5.8% per annum, of operating cost efficiencies were delivered in 2010/11. Pennon said this was being achieved through changing operational ways of working; rightsourcing and innovative contracting arrangements; energy procurement and reduced usage; and the rationalising of administration and support services.

The Group said that South West Water’s performance on the AMP5 capital programme, with its increased emphasis on maintenance of existing assets (66% of the total programme compared with 43% in K4), was being targeted to achieve 5% outperformance of the Final Determination.