More on Pennon
Pennon: 2005/6 results
Water company Pennon reported that operating profit rose 16% (to £175.1m) in the year to March 2006, driven by regulatory price increases.
The company runs South West Water and Viridor Waste. South West Water (which earned around 80% of the company’s operating profits in the current year) holds the water and sewerage appointments for Devon, Cornwall and parts of Dorset and Somerset. Viridor Waste runs a waste treatment and disposal business in the United Kingdom.
Like most other water companies, Pennon has benefited from a generous regulatory price review from the regulator OFWAT. OFWAT has effectively granted Pennon a 25% increase in real terms (ie after taking into account inflation) in water prices over a five year period. The new price regime started in April 2005, when the first 12.5% price increase was implemented.
Increases in tariffs added £49.5m to revenues of South West Water (total revenues for the year reached £348.5m) while 7,400 new customer connections
contributed £2.8m in additional revenue. This was partly offset by customers switching from unmeasured to metered charging caused a reduction of £7.9m in turnover. Small decreases in measured demand, amongst other factors reduced turnover by £2.9m.
Acquisitions and new contract wins in landfill and power generation were the drivers behind growth at Viridor Waste.
Given the favourable price review prospects look good. The principal risks to earnings come from rising energy costs and a possible switch to metered consumption, which may hit turnover.
The share trades at 1312p, on a prospective PE (2007 earnings) of 13.2x, witin the sector range with a yield of 4.4%.
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