Financing the private water and sewerage Companies of England and Wales

South West Water and Pennon Dividends

Last update Wednesday 15 July 2010

South West Water, although it collects its own revenues, is effectively a publicly funded company just like the BBC. The water and sewerage charges are based on Ofwat financial projections, with generous provision for surplus revenue, and levied on a relatively stable base of captive customers. It therefore should come as no surprise that in the South West Water pseudo "profit and loss" accounts, the "operating profit" (as the revenue surplus is dubbed) is predictably spectacular. This misrepresentation might be considered a harmless affectation, were not for the fact that these false profits are also included, with no explanatory note, in the annual financial returns of the parent Pennon Group Plc.

The inclusion of the South West Water revenue surplus, as if it were true commercial profit, obviously distorts the Pennon “profit and loss” account, the more so since the South West Water contribution (particularly the "profit") is such a large proportion of the whole. The fact is that the Pennon Group annual financial reports are misleading as evidence of the group's commercial performance. A further interesting aspect of the accounts is that not all of the huge dividend taken from South West Water is passed on to Pennon shareholders. As will be seen from the table, of the total dividend taken of about £1,600 million taken by Pennon, only about £1,140 million was passed on to the Pennon shareholders so that about £460 million was retained to subsidise the associate companies in the commercial segment of the group.

Pennon & South West Water

annual revenue and dividends from 1989 to 2010   (M)
S.W.W.
revenue
S.W.W.
dividend
Pennon
revenue
 Pennon
 dividend
2009-10 444.2 54.4 1068.9 79.6
2008-09 424.7 103.8 952.9 73.4
2007-08 421.0 68.7 875.0 69.1
2006-07 381.8 75.0 748.3 66.0
2005-06 351.0 197.9 645.7 61.0
2004-05 310.0 79.5 551.4 55.1
2003-04 292.0 75.6 455.1 51.1
2002-03 270.3 72.7 417.2 144.3
2001-02 260.4 66.7 374.8 51.4
2000-01 251.4 60.4 353.2 49.4
1999-00 281.4 64.0 467.0 65.1
1998-99 270.1 60.0 437.1 61.9
1997-98 251.2 165.1 382.4 54.1
1996-97 244.6 56.1 343.6 47.4
1995-96 239.3 46.5 314.4 38.9
1994-95 236.6 145.0 293.7 35.4
1993-94 210.2 41.5 251.6 32.0
1992-93 185.7 38.8 194.4 29.5
1991-92 160.4 34.9 166.5 26.8
1990-91 140.2 32.4 143.8 24.4
1989-90 121.1 34.6 121.0 21.3
Totals 5,747.6 1,603.2 9,558.0 1,137.2

It might be expected for the Pennon dividend payment to be made up of contributions from all associate companies within the group whereas, with few exceptions, the annual dividend taken from South West Water is obviously considerably more than was necessary to satisfy the Pennon shareholders. The fact is that, from the nearly £4,000 million additional revenue from the commercial segment of Pennon, there has not only been no contribution to the aggregate group dividend payout, but the segment has actually been subsidised to the average tune of about £20 million a year ever since flotation. The subsidy of course comes from the more than £460 million of the £1,600 million dividend taken from South West Water but retained by the group and not passed on to Pennon shareholders.

This does not say much for the commercial acumen of Pennon management and must make business very difficult for competitors of commercial companies in the Pennon Group. There can surely be no doubt that commercial Pennon would hardly be a viable operation without the huge cash injection from South West Water, which is only possible through the lax and careless policy of "arm's length regulation", with its blatant disregard of the statutory protection of customer interests, adopted by Ofwat.