Pennon profits drying up

Water utility Pennon (PNN), which serves Cornwall and the Bristol area, has seen its half-year profits slammed by higher operating and financing costs. But management has said these would be passed on to consumers in the coming year, so there would be some level of catch-up in future earnings statements. 

Against a sales hike of 9 per cent, the cash profit was down 12 per cent to £175mn and the underlying pretax profit came down 75 per cent to £22.5mn. Net interest costs doubled in the period, to £75mn. 

Like other water utilities, Pennon has come under heavy scrutiny for poor water quality in its areas. Cornwall is even the base of Surfers Against Sewage, a lobby group which highlighted Environment Agency data that said South West Water released sewage for almost 2,000 hours in the 2022 ‘bathing season’, running from May to September. United Utilities (UU.) was worst on this measure with over 10,000 hours of discharge recorded. 

Pennon said it had achieved “100 per cent bathing water quality for the second consecutive year” and has also had a 50 per cent reduction in storm overflow use during the bathing season. 

The company is also increasing spending on maintaining water supply in Cornwall after this past dry summer. Chief executive Susan Davy said £45mn would go toward “repurposing ex-quarries and mines”, although this spending will largely be in the next financial year. 

Net debt will increase with these spending plans - as in this period, servicing borrowings will continue to cut into net debt. Of the gross debt of £2.8bn, 30 per cent is index-linked, although this month the company locked in its interest to 2025 through £300mn in interest rate swaps. 

As we’ve said with other utilities, the stable payout and regulatory-backed business model is not overly thrilling at the moment, but it remains a strong addition for income. Buy. 

Last IC View: Buy, 1,013p, 31 May 2022