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Pennon to be hit by higher costs resulting from contract dispute with Interserve

Pennon said it is well-placed to respond to new price limits proposed by water regulator Ofwat

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Pennon said it achieved a “robust underlying financial performance” for the year

Pennon Group plc (LON:PNN) said it has been hit by higher-than-anticipated costs for the construction of its Glasgow energy recovery facility (ERF) after having to replace Interserve PLC (LON:IRV) as the contractor.

Interserve’s contract with Pennon’s waste management business, Viridor, to construct the Glasgow plant was terminated in 2016 after ongoing delays.

READ: Pennon negotiates reset to Greater Manchester waste contract as it reports first half profit growth

In a trading update on Monday, Pennon said overall expenditure for the completion of the project is expected to be £95mln higher than the £155mln original target.

The company said margins on the life of the project to 2043 could be lower than initially predicted, depending on the outcome of its contract settlement with Interserve.

However, Pennon does not expect an “immediate impact on earnings” and added that discussions with Interserve are ongoing.

“Viridor is contractually entitled to recover incremental costs from the original principal contractor, Interserve, under certain circumstances,” the group explained.

Pennon said it continues to expect the “UK residual waste market dynamics to be favourable with demand for energy recovery facilities exceeding capacity into the long term”.

Viridor's ERFs exceed expectations

Viridor’s portfolio of ERFs continue to perform above expectations with underlying earnings (EBITDA) to be second half weighted, Pennon added.

Commissioning is underway at Beddington in South London and at Dunbar in Scotland while construction is underway at Avonmouth in Bristol, where the lead contractor is CNIM Group.  

In recycling, Viridor predicts lower second half EBITDA as a result of China’s new restrictions on imports, though it is not expected to have a material impact on the group’s overall performance.  

Overall 'robust' performance, well-placed to tackle Ofwat clampdown 

Across the group, Pennon said it has achieved a “robust underlying financial performance” and is on track to meet management expectations for the year ended March 31, 2018.

It added that it is well-placed to respond new price limits proposed by water regulator Ofwat.

The company said its South West Water arm continues to “perform well” and expects it to reach a return on regulated equity of 11.8%.

Quick facts: Pennon Group PLC

Price: 902.8 GBX

LSE:PNN
Market: LSE
Market Cap: £3.8 billion
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