Pennon Group, owners of South West Water, has this morning announced its latest financial results for the half year ended 30 September 2011.

Group pre-tax profit was up 11.6% to £107.4m, while profit at South West Water was up 8.5% to £76.2m.

In a statement, the Pennon Board said that the group businesses remained well positioned in current difficult economic conditions.

South West Water has turned in a strong performance against the 2010 – 2015 regulatory contract. Capital investment was up 26% to £51m compared to the same period last year. Pennon said the utility had made a further advance in operating efficiency, delivered its best ever bathing water results and had passed its fifteenth consecutive summer without hosepipe bans or drought orders in 2011. The company has also met its leakage target every year since inception.

During the period revenues rose 5.8% to £244.3m as a result of tariff increases and new connections offset by an overall reduction in demand and the effects of customers switching to a metered tariff. 72.5% of South West Water’s domestic customers are now metered.

Approved tariff increases amounted to £19.1m while customers switching from unmeasured to metered charging reduced revenue by £3.7m. However 3,137 new customer connections contributed £1.4m of additional revenue. Customer demand fell by 2.3% on the same period last year, with general economic conditions impacting industrial and commercial customer demand.

South West Water’s operating profit increased by £7.5m (7.5%) to £107.9m, while  operating costs went up from £130.5m to £136.4m.

Other cost drivers were:

• costs from new capital schemes of £3.7m (including additional asset maintenance costs of £2.1m relating to the increased emphasis on maintenance in the investment programme);

• new legislative commitments for the adoption of Private Sewers of £1.5m;

• higher bad debt charges of £1.0m reflecting the difficult economic environment; and

• lower property sales in the half year of £1.2m; partially offset by a £1.5m reduction in restructuring costs.

South West Water’s programme of organisational restructuring continued with a further £0.9m (2010/11 - £2.4m) incurred on restructuring in the first half of 2011/12. IThe company expects that a further £1.6m will be provided in the second half of 2011/12.

Capital investment in the half year was up 26% to £50.9m compared with £40.3m in the first half of last year. The focus for the capital programme is now weighted towards asset maintenance schemes, increasing the resilience of the company’s infrastructure and improving water quality.

Major investments include construction of a new borehole, significant improvements to three water treatment works and a programme of waste water works improvements.

Pennon said that efficiency delivery is being achieved through South West Water’s improvement programmes including:

• operational ways of working (PUROS - Phased Utilisation of Remote Operating Systems );

• energy procurement and usage, with energy prices for AMP5 fixed at rates favourable to the Final Determination;

• rationalising administration and support services; and

• right-sourcing and innovative contracting.

Operational Highlights

South West Water’s company-wide ‘Pure Water, Pure Service, Pure Environment’ strategy is the cornerstone of the company’s operations, with the top priorities being to improve customer service and deliver operational efficiencies.

The company is also implementing further strategies over the winter months to support and maintain the security of future water supplies. Park and Stannon Lakes, both operational in 2011, represent a significant addition to water resources in Cornwall and further increase the robustness of the company’s water supply system.

South West Water is also constructing its first new borehole in 18 years. Investments made in the first half of 2011/12 include process developments at water treatment works to improve filtration and further water mains replacements.

In response to the Government’s commitment to fund a cut in the customer bills in the region, Pennon said that South West Water is continuing to work closely with Government and its regulators to examinethe practicality of all options to aid customers.

On the environment, the statement said that work on the innovative industry-leading programme of work known as ‘Upstream Thinking’ to improve raw water quality in a sustainable way was ongoing. South West Water is currently working on six major catchment management projects, including a significant programme on the main moor sources on Exmoor and a pilot project on Dartmoor, to re-establish the wetlands that naturally cleanse water and improve water quality in rivers and reservoirs.

Work is under also way across the region to identify necessary investment projects that will protect rivers and watercourses from pollution and erosion, with the largest projects targeted around the company’s biggest reservoirs – Roadford and Wimbleball.

Up to £44M to be spent on private sewer infrastructure

The transfer of private sewers and lateral drains to South West Water’s responsibility and ownership on 1 October 2011 has resulted in an estimated increase of over 50% in the company’s existing 9,300km base sewer network.

Estimated costs of the transfer, including the transfer of 900 private pumping stations by 1 October 2016, include:

• set-up expenditure reflecting system developments and sewer mapping c.£2m, of which £1.5m was incurred in the half year;
• ongoing operational expenditure, for example, sewer blockage removals of £2m-£5m per annum dependent on activity levels;
• ongoing maintenance of the asset base, for example, sewer repairs of £4m- £6m per annum dependent on activity levels.

The company is also budgeting for an investment of up to £44m related infrastructure improvements, on transferred assets which are not constructed to appropriate standards.