Pennon Group, owner of South West Water, has reported a 7.6% increase in profits to £87.3m at the utility with the publication this morning of its results for the half year ended 30 September 2013.

On customer bills, South West Water has announced a tariff freeze for 2014/15, which Pennon said would be achieved “without loss of shareholder value.” Ofwat has supported the company’s proposal that the revenue foregone in 2014/15 will be taken into account in the forthcoming price review.

On its AMP6 Business Plan proposals, in addition to the 2014/15 tariff freeze the company is also proposing that there will be no average bill increase in 2015/16 followed by below forecast inflation increases to 2019/20.

Overall profit before tax for the Group was up 3.5% to £110.9m – profits at its waste business Viridor fell heavily by 28.8% to £15.3m.

The Group increased its interim dividend per share by 7.2% to 9.39p in line with its previously announced policy to grow the Group dividend by 4% per annum above inflation up to the end of 2014/15.

Pennon said that South West Water had seen a continued strong operational performance against the 2010-2015 regulatory contract, attributing the profit increase to higher revenues and rigorous cost control. 

South West Water’s operating profit for the half year increased by £6.5m (5.7%) to £121.3m.

Revenues rose 4.9% to £269.1m as a result of tariff increases, higher other sales and new connections, slightly offset by the effects of customers switching to a metered tariff.

Approved tariff increases amounted to £12.7m and 3,100 new customer connections contributed £1.2m of additional revenue. Other sales increased by £1.2m predominantly as a result of higher developer services activity.

Customers switching from unmeasured to metered charging reduced revenue by £2.5m. 78% of South West Water’s domestic customers are now metered.

Capital expenditure in the first half of 2013/14 was £58.5m compared with £42.7m in the first half of 2012/13. Pennon Group said the focus for the capital programme remains weighted towards asset maintenance schemes and increasing the resilience of the company’s infrastructure.

Major investments by South West Water for the half year included:

• A focus on improving water quality; upgrades at biggest water treatment works
• Safeguarding water supply and reducing interruptions; upgrades to strategic reservoir
• Targeting compliance; investment in 113 sites in past 2 years
• Investment in assets to improve shellfish and bathing water quality

The ‘Pure Water, Pure Service, Pure Environment’ strategy is the cornerstone of South West Water’s operations - a significant proportion of the company’s capital programme in 2013/14 is focused on maintaining drinking water quality.

The utility also has a number of ongoing improvement programmes in place including

• operational ways of working – integration of customer services management and asset improvements through PUROS – the Phased Utilisation of Remote Operating Systems programme
• energy procurement and usage – energy efficiency schemes alongside additional power generation through renewable sources
• rationalising administration and support services
• right-sourcing and innovative contracting – continued tenders to achieve the ‘right price’

On bad debts, Pennon said the cost at the utility is comparable with the first half of the prior year and as a proportion of revenue at 1.8%, is consistent with the full year 2012/13, reflecting general economic conditions. The utility has a range of measures to address the issue, including collection initiatives to further improve the bad debt position via the use of tracing tools to target former occupiers of newly vacated properties.

The ‘Restart’ programme is continuing to incentivise customers to enter into regular payment plans. A number of schemes are also in place to assist vulnerable customers in the region, including the successful introduction this year of South West Water’s new social tariff ‘WaterCare’ which aims to assist customers by reducing bills to an amount they can better afford to pay.

On energy, South West Water has maintained its investment in renewable energy, bringing the total expenditure for AMP5 to over £4m. Solar energy represents a significant proportion of this expenditure, with over one million kilowatt hours of solar energy generated last year.

In the run up to competition, the company has also applied for a retail water supply licence to allow it to retail water to customers outside the region it currently serves.

Commenting on the results, Ken Harvey, Chairman said:

“I am pleased to report further progress in the Group in the half year.

“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 improving standards of customer service, notwithstanding the extreme flooding and then the dry summer experienced during the first half of this year. South West Water is well prepared for PR14 and will publish its Business Plan on 2 December."