Anger at South West Water's £200m payout

Pennon, the owner of South West Water, provoked anger among customers yesterday by announcing plans to hand back £200m to shareholders just nine months after being allowed to raise household bills by 25 per cent.

The company, which has the highest water charges in the country, defended the payout to shareholders by saying that its 750,000 customers would also benefit from the balance sheet restructuring through a one-off rebate of £20, costing a total of £15m.

But the Consumer Council for Water in the South West said there was no cause for celebration. "This good news does not diminish overall concerns about the disproportionate price for water services for consumers in the South West region who frankly can see no light at the end of the tunnel in terms of relatively steep increases," Charles Howeson, said the council's chairman.

South West Water's average domestic bill is rising from £357 last year to £444 in 2009-10 under a five-year price control introduced in April by the industry regulator, Ofwat. The price rises are designed to help pay for an £850m to £900m capital-expenditure programme.

Bills this year have gone up by 12.5 per cent enabling South West Water to increase profits by 15 per cent to £77.8m in the first half of the year.

Pennon's finance director, David Dupont, said that Ofwat had been informed in advance of the £200m handout to shareholders and had raised no objections because the aim was to maximise the efficiency of the company's balance sheet.

The effect of the capital repayment will be to increase South West Water's ratio of debt to regulatory asset value from 55 per cent to 66 per cent, which is just on the limit of what Ofwat is happy with.

Keith Mason, Ofwat's head of regulatory finance, said that had Pennon announced the capital repayment to shareholders before the new price controls were set, then the regulator would probably have set a marginally tighter cap on price rises. He added that the financial benefits Pennon achieved from its new financing structure would be taken into account the next time prices are reviewed.

The £200m payout to shareholders will reduce Pennon's share capital by about 13 per cent and is being achieved through an issue of redeemable B shares worth £145m or 110p a share and a £55m share buyback. Pennon is also lifting its dividend for the year by 20 per cent to reflect the reduction in the shares in circulation. Thereafter, the dividend will rise in real terms by 3 per cent a year. Pennon shares closed 4p lower at 1150p.