A city analyst as told WWi that more utilities are likely to follow as Pennon Group (LSE: PNN), parent company of South West Water, issues an interim management statement warning that profits at the UK utility will be impacted by the 2014/15 tariff freeze.
However, according to the statement South West Water (SWW) is continuing its strong financial performance with robust operational delivery and high standards of customer service, and the company expects to complete the successful delivery of the K5 (2010-2015) regulatory contract.
The statement added that the revenues foregone due to the tariff freeze are included in the Draft Determination for the K6 (2015-2020) on an NPV neutral basis.
Following early receipt of its Draft Determination for the K6 regulatory contract in April this year, Pennon said that SWW is able to accelerate a number of key projects (e.g. bathing water improvements) ahead of significant legislative changes.
The statement also said that South West Water is well placed to deliver its business plan in K6 and will have an opportunity to outperform the assumed returns on equity.
Commenting on the statement, Ken Odeluga analyst from City Index told WWi that “relief for the consumer means pain for the utilities”.
“Pennon is the latest regional water operator to say the government’s price freezes and industry reviews are having a negative impact,” he said. “Last month, Severn Trent, another big regional water group, also made a profit warning.”
“As for, Pennon it can’t blame its profit drop entirely on the price freezes,” continued Odeluga. “That’s because Pennon’s first-half results also show a fall in its landfill business [at Pennon’s waste and recycling subsidiary, Viridor], something that has been known about for a number of years.”
However, the analyst added that that part of Pennon’s business should still be in profit by the end of the year.
“All in all, we don’t expect these profit warnings in the water sector and in utilities as a whole, to be the last,” he added.
“We expect significant hits to water companies’ earnings and perhaps dividends too,” concluded Odeluga.
