Pennon has reported £73m in total expenditure (totex) savings at its South West Water subsidiary for the 2016-17 and Outcome Delivery Incentive (ODI) rewards of £3.6m net of 0.3m in penalties contributing to a return on regulated equity (RoRE) of 11.9%. Pennon chief executive officer, Chris Loughlin (pictured), described the outperformance as “sector leading.”
Cumulative RoRE for the first two years of the price control period was £129m
Operating efficiencies balanced increases to keep operating costs flat year on year at £211.9m while capital expenditure was up from £134m in the previous to £191m
ODI rewards were for bathing water quality, odour complaints, water restrictions and leakage. Penalties were for pollution incidents and external flooding.
Pennon calculated its RoRE benefit at £35m using its preferred finance calculations based on the forecast inflation figure used in its price control. That gave a RoRE of 12.6% compared to Ofwat’s 11.7% figure based the actual retail price index. Pennon argued that its approach was more in keeping with its Watershare scheme under which South West shares totex savings and ODI rewards as well as financing windfalls with shareholders and customers.
Operating profit for 2016-17 was up 4.9% at £235m with profit before tax up also 4.9% greater at £174m. Revenue for the reporting period at South West was up £14m to £561m with £13.5m of the increase all but equally split between tariff hikes and growth in customer numbers.
Pennon group revenue for 2016-17 was virtually unchanged on the previous year at £1.35 bn with underlying profit before tax up more than 18% at £250m. Extraordinary costs of £10.7m – almost entirely accounted for in the cost of a shift to a new group information services platform, and a net cost of some £29m in derivative movements were offset by £21m in deferred tax due to a change of rate. These non-underlying items added 2% to group pre tax income on the previous year to £210.5m for 2016-17.