Pennon Group Plc

At the end of the K4 period South West Water reported that it had a solid platform in place for continued success during the new K5 period. 2010/11 has seen the company already benefit from that robust position to deliver a strong start to K5 both financially and operationally with improved standards of customer service.

Our company-wide ‘Pure Water, Pure Service, Pure Environment’ vision is the cornerstone of our business and the company’s operations.

Business performance

Our strong financial results for 2010/11 saw our profit before tax broadly maintained compared with the previous year, despite the reduced rate of return allowed for the whole industry in the 2009 Ofwat price review. Capital expenditure was also broadly stable at £125.1 million after adjusting for non-recurring items in the prior year (£20.9 million for the substantial K4 water mains rehabilitation programme and £9.7 million advanced K5 expenditure). A strong cash flow performance improved our gearing ratio.

We also consistently have one of the lowest costs of financing of any company in our industry, having successfully used our expertise to ensure ongoing financial outperformance.

A high and improved level of operational performance was achieved during the year despite some of the most extreme winter weather conditions experienced in the South West for many years. Indeed, under these weather conditions, our network demonstrated a good level of resilience due to the company’s past investment in infrastructure, which produced tangible results even in a time of extreme stress being placed on our assets. It also illustrated the reliability of our network with our operating assets again achieving a consistent ‘stable serviceability’ rating.

A step-change in efficiency

A strong start has been made towards achieving targeted operating cost reductions. The company has front-end loaded delivery of efficiencies of 2.8% per annum targeted for the K5 period (2010-2015). Some £8.4 million, equal to 5.8% per annum, of operating efficiencies were delivered in 2010/11. This was achieved through changing operational ways of working; right-sourcing and innovative contracting arrangements; energy procurement and reduced usage; and the rationalising of administration and support services.

South West Water has now purchased 94% of its K5 energy requirements at a lower market price than that assumed in the Final Determination.

Performance on the K5 capital programme, with its increased emphasis on maintenance of existing assets (66% of the K5 total compared with 43% in K4), is being targeted to achieve 5% outperformance of the Final Determination¹. South West Water continues to deliver capital projects in line with Ofwat, Drinking Water Inspectorate and Environment Agency expectations. Stable serviceability was maintained for all service areas.

Overall customer debt cash collections were stable despite the difficult economic environment with the bad debt charge, as a percentage of revenue, broadly consistent with the prior year.

¹ Using 2009 Final Determination estimates of Construction Output Price Index.

Pure Water

This year the company again successfully met both its annual and three-year rolling leakage targets and has done so ever since leakage targets were originally set by Ofwat. This was achieved in spite of the coldest December in England in 100 years which caused an exceptional number of burst pipes across the region.

A significant proportion of the company’s capital programme in 2010/11 was focused on maintaining drinking water quality which remained near perfect with a 99.97% sample mean zonal compliance rate during the 2010 calendar year. Investments made during the year included filtration improvements to a number of water treatment works; security enhancements and climate change adaptations at works; and refurbishment of the Lopwell raw water pumping station.

South West Water has put in place a comprehensive strategy to ensure a continued secure supply of water for the region. 2010 was the 14th consecutive summer with no water restrictions and it is envisaged that there will be no water restrictions in summer 2011 despite the very dry conditions in the year so far. More cost effective than building new reservoirs, the two disused china clay pits acquired in 2006 and 2008 and now converted into Park and Stannon Lakes, represent a significant addition to water resources in Cornwall and further increase the robustness of the company’s water supply system. Park Lake became fully operational last year and Stannon Lake will follow this summer. The two lakes are the region’s fourth and fifth largest reservoirs (behind Roadford, Wimbleball and Colliford).

Pure Service

South West Water’s emphasis on excellent service is delivering tangible improvements for customers and is reflected in reducing levels of contacts (particularly repeat contacts). Customer satisfaction levels are rising. Service improvements undertaken in the past two years to reduce customer complaints are delivering results, with complaint levels falling for the second year running (written complaints down by more than a quarter on 2009/10).

South West Water has welcomed the Government’s response to the Walker Review of charging for household water and sewerage services. The proposal for Government to fund a cut from 2013/14 in the average bill of all customers would be especially well received by customers alongside proposals to target help at those in most need by pegging the ‘Water Sure’ tariff to the lower national average metered bill and allowing us to develop our own social tariff. We will continue to work closely with Government and our regulators throughout the consultation phase to examine the practicality of all options to aid customers.

Regulations laid before Parliament, once they come into effect, will allow for the transfer of private sewers and lateral drains. South West Water has operational plans in place to manage the transfer and a procurement process with suppliers to deliver the service to customers is underway. Incremental costs incurred will need to be funded by future adjustments to price limits.

Pure Environment

As the UK’s premier tourist region, the quality of the South West’s seas and beaches is particularly high profile. In 2010 a record percentage (90.3%) of our bathing waters achieved EU Guideline (excellent) standard, up from 84.0% in 2009, while 96.5% passed the Mandatory (minimum) standard, the same as in the previous year. The South West region also features the highest proportion of high quality rivers in England.

This summer South West Water will also be launching a new real time information website, ‘Beach Live’ updating visitors on any potential risk to bathing water quality at around 25 of the most popular beaches in our region caused by storm overflows operating after heavy rain. The website will be one of the first in Europe to offer this service to beach users on a daily basis.

Our programmes to achieve energy efficiency and carbon reduction targets have made good progress this year. The energy awareness campaign, ‘PowerDown’, working with the Energy Savings Trust, has been very successful in cutting energy use. The ‘PowerDown’ scheme has been recognised externally, being the Business Award winner of the Devon Environmental Business Initiative. The combined energy volume reductions target of 3GWh has been met from these activities.

We have also made good progress in the development of our renewable energy systems, with major overhauls and control system replacements for our larger sewage gas combined heat and power plants to give improved reliability and increased outputs. Our larger investment programme for new hydroelectric capacity has included a number of innovative, cost-effective solutions.

South West Water is working to integrate into all its business operations more sustainable ways of working that support the company’s climate change adaptation programme.

An important achievement for the company during the year was the receipt of Emissions Measurement and Reduction certification. This can only be achieved by organisations that have not only made credible carbon reductions over the past three years but also have robust plans in place to make more reductions in the future.

South West Water has embarked on an innovative programme of work called ‘Upstream Thinking’ to improve raw water quality in a sustainable way. This initiative – seen as best practice in the industry – seeks to improve the quality of water that feeds into treatment plants from the main moorland sources of Dartmoor and Exmoor by helping to re-establish the wetlands that naturally cleanse water by slowing the flows on their downhill journey to rivers and reservoirs. Receiving better quality water at the company’s plants reduces the work required to cleanse it for human consumption, lowers the quantities of chemicals the company has to use and increases the cost-effectiveness of its operations. Work to re-wet uplands, restore grasslands and revise farming practices is underway and by working with farmers, environmental bodies and statutory bodies, the company also aims to achieve multiple environmental benefits.

Our employees

Our employees are the foundation of our success. It is one of our core values that our people matter and we have programmes in place to both support the progress of employees and to ensure their safety at work. Examples of these include a Post Graduate Certificate in Management developed with the University of Exeter’s Business School, the ‘GROW’ staff development programme providing training in personal growth and business strategy and two programmes launched during the year that are designed to keep our employees safe at work – one concentrating on behavioural health and safety training and the other on ensuring safe driving habits.

The commitment and professionalism of our employees have been essential ingredients in achieving this year’s success.

We are confident that the continued outstanding performance of our employees, with all the support we can give them, will ensure another good year of operations in 2011/12.

Key relationships

Regulators and others
South West Water has a wide range of contacts with its environmental and regulatory stakeholders involving many different functions within the company. Central processes are also in place so that we can be confident that stakeholder contacts are dealing with the people most able to assist them, that consultations and information requests are handled in the most efficient manner and that information given to stakeholders is of high quality and consistent. The company contributes to national policy on developing issues through its membership of Water UK, the industry trade body, and we work with the Consumer Council for Water to ensure that customers’ issues and concerns are addressed and a full understanding of the company’s activities is maintained.

Procurement and suppliers
Our procurement strategy is focused on partnering and strategic alliances with 60 key suppliers who account for the large majority of expenditure. We include all aspects of sustainability in our procurement processes and this is a central theme of our procurement strategy for our supply chains and support of the regional economy. With the start of the K5 regulatory period we introduced an innovative ‘mixed economy’ model to source our capital programme. This means using a significant number of smaller local contractors to provide specialised services as well as longterm relationships with more major supply chain partners. No supplier (revenue) accounts for more than 5% revenue and South West Water sources all its purchases from competitive markets.

Focus for K5

The focus for K5 is to continue to strike the right balance for investors, customers and other stakeholders. We have already delivered substantial efficiencies over the last two decades and will continue to focus on delivering further efficiency while satisfying regulatory demands and improving services to customers.

Our plan for K5:

• targets outperformance of the regulatory contract
• continues to control costs rigorously
• delivers investment through increased capital maintenance that will secure operating cost savings and protect the service improvements made over the last 20 years whilst preparing for future increased investment requirements.

Page last updated: June 2011