Pennon earnings tumble as focus shifts to capex

South West Water owner Pennon (PNN) has seen its profits fall significantly in the 12 months ending 31 March, as power and other operating costs climbed at the same time as a drought hit Dorset and Cornwall. Pennon also runs Bristol Water, which came under the former’s umbrella formally in March. 

Its underlying profit before tax fell 88 per cent to £17mn, with its net interest charge also taking a chunk out of earnings. 

Like others in the water sector, Pennon has also flagged much greater pressure to curb its dumping of sewage and wastewater. Capital spending was largely focused on “water resources investments”, however, in response to very low storage levels after the dry summer. Overall spending climbed by half to £358mn, and the company aims to spend £750mn over the next two years. 

On top of the pressure to stop sewage and wastewater releases, the focus has also increased on leakage in the UK’s water networks. Ofwat has also specifically opened an investigation into Pennon’s reporting of “operational performance data relating to leakage and per capita consumption” for the 2022 financial year. 

Pennon has increased its dividend 11 per cent in line with its inflation-plus-2 per cent policy. Its return on regulated equity, the measure by which utilities measure their use of capital, was 10.5 per cent, up from 8.9 per cent. United Utilities (UU.), which runs water monopolies in the North West, managed a jump of 3.3 percentage points in the same period. 

The business model of the private utilities has come under heavy scrutiny, given the combination of heavy spending requirements to get infrastructure up to scratch, and the high dividends being paid. Something has to give. Move to hold. 

Last IC View: Buy, 917p, 30 Nov 2022