Pennon, the owner of South West Water and waste management business Viridor, made a splash with its results for the year ending 31 March, beating expectations.
The FTSE 250 firm reported an 18 per cent rise in pre-tax profit to £250m, which it attributed to improved cost savings at South West Water, as well as increasing customer demand. The firm said it remains committed to reducing the cost of water bills by 2020.
Earnings before interest, tax, depreciation and amortisation rose 8.4 per cent to £486m, compared to £448.4m the year before.
Revenue was fairly flat at £1.4bn.
Earnings per share were up by nearly a fifth to 47p, with dividend per share up 7.1 per cent to 35.96p.
Nicholas Hyett, equity analyst at Hargreaves Lansdown, said cost control was an area where Pennon particularly shone:
There's little reason to think that the group won't be able to maintain what is one of the most generous dividend policies in the sector for years to come.
Shares edged up 0.83 per cent to 911p in mid-morning trading.
Why it’s interesting
Pennon may be making a splash with its full-year results with higher than expected earnings, but the forecast is a little less certain for water firms, with summer drought fears looming.
Pennon boss Chris Loughlin said that current reservoir levels "are not unusual for the time of year, but reflect the dry weather we have experienced over the last six months".
"We are well placed for the higher demands we normally experience during the summer period and we currently expect this to be our 21st consecutive year without water restrictions," Loughlin added.
He said restrictions on non-essential use of water are unlikely given "our healthy storage position".
Industry regulator Ofwat has been drafting up radical proposals to encourage UK water firms to trade water in a bid to boost supplies, City A.M. revealed earlier this month
Draft proposals to incentivise trading to be published this July ahead of the industry’s next price review in 2019.
Ofwat said water trading can “benefit the environment and customers as it can allow more expensive investment in developing new resources within a company’s area to be deferred, reducing future upward pressures on bills”.
What the company said
On the prospective Ofwat proposals, Loughlin said: “We support using water wisely and water trading is one of many options available to achieve this. We already have arrangements in place with other companies and will continue to explore incentivised solutions that deliver for customers and investors. We are currently in surplus.”
Regarding the overall results for Pennon, the chief executive said: "Across the group we are investing for growth while driving efficiency to keep costs low for the benefit of our customers. We have delivered savings of £129m in total expenditure at South West Water since the beginning of the current regulatory period, cementing our commitment to reduce the real cost of water bills to 2020."
We believe Pennon is well positioned now and for the future and our performance underpins our long established sector-leading 10 year dividend policy of four per cent growth per annum above RPI inflation out to 2020.