The combination of generous pay awards and Bermuda’s overheating economy are putting pressure on local businesses trying to attract and retain staff, says Watlington Waterworks chief executive officer Allan Rance.

Mr. Rance spoke with The Royal Gazette after the supplier of piped and bottled fresh water announced 2006 profits of $2.05 million — down 3.7 percent on the previous year, despite the fact that revenue was up by some $550,000.

In its statement to the Bermuda Stock Exchange (BSX), Watlington said: “We experienced expenses rising faster than revenue through 2006 due primarily to high electricity expense and higher labour costs.

“Increasing labour costs remain worrisome because awards made elsewhere that significantly exceed the inflation rate, combined with our over-heated economy in general, are placing substantial pressure on our company to remain competitive as an employer of choice.”

Expanding on the point, Mr. Rance alluded to public-sector pay increases agreed last July that were substantially above the 3.1 percent inflation rate. Civil servants were awarded a deal entailing a 4.5 percent pay increase in year one and a four percent increase in the second year. Other Government employees higher up the pay scale, earning at least $115,000, won increases of up to $20,000.

“Those awards were made public, but there were many other settlements done privately,” Mr. Rance said. “What is apparent to us is there is a big demand for skilled workers and and a great shortage of Bermudian mechanics.

“We are fortunate in that we have a very loyal staff, but when they are hearing of these high awards elsewhere, it becomes difficult for us to retain them.” Part of the equation of rising labour costs was the overheating economy, Mr. Rance said, and in particular the booming construction sector — a situation presenting challenges to many local businesses.

“We have drivers for our bottled water division, who could probably do better if they went off to work for a construction firm,” Mr. Rance said. “In our utilities division, we have pipe fitters and plumbers, who are in extremely high demand and if we are to retain them as loyal members of the team, then we have to be competitive.

“This is the way the overheating economy affects us when you have a construction industry that is bursting at the seams.”

Watlington Waterworks, the parent company of Bermuda Waterworks, which is its wholly-owned operating company, supplied 265 million gallons of fresh water to Bermuda in 2006. Some was from its groundwater source, but around two thirds came from a plant comprising six desalination units.

It has capacity to substantially increase its output and is investing in new infrastructure to reach more homes. In 2006 Watlington Waterworks installed three pipelines in Warwick parish and one in Southampton East, and also the first phase of the replacement of two old pipelines from the Middle Road reservoir to Hamilton. The first phase replacement was from the reservoir to Corkscrew Hill, and the additional phase on to Hamilton is being completed during the first quarter of 2007.

Mr. Rance said the company intended to add to its existing 40 miles of pipeline which supply close to 1,500 homes in an area stretching from Devonshire to Southampton. Most of the work involves branching out to reach clusters of homes tucked away off the main roads.

Watlington’s BSX statement added: “We maintain that we are in downturn in the business cycle compared to a few years ago. The Wyndham Sonesta closure late in the year represents a significant revenue loss for the company. It is impossible to replace a loss of that magnitude.

“We are well positioned to benefit from proposed future tourism growth but it will be some time before that actually comes on line. We remain of the opinion that our best course is to continue to invest in mains expansion and to strengthen other infrastructure where possible to improve efficiencies.”

Mr. Rance said the company was “hopeful” of new business emerging from a proposed group of new hotels.

“Fifteen years ago, we were supplying 75 percent of Bermuda’s hotel beds and we have had to make major readjustments to survive with the decline of tourism since then,” he said.

“But with tourism turning around now, we expect to see an improving situation in the summer months when we have more visitors on the Island. We are hopeful that we will have an opportunity to supply some of the new hotel developments. Some of them may wish to build their own water plants to save money. But our service will offer them greater reliability than any private plant can give.”

Watlington’s BSX statement added: “The most significant financial event during the year was the repurchase of 25 percent of our issued share from GE Ionics Inc. G.E. Ionics decided to divest themselves of our shares and gave us the first option to repurchase their shares.

“The board felt it was in the best interest of shareholders to repurchase the shares and an agreement to repurchase was made in late June at a price of $11.80 per share. This was financed by a combination of the Company’s working capital and an overdraft facility with The Bank of N.T. Butterfield & Son Limited.”

Watlington’s net earnings per share were $2.16 in 2006 versus $1.68 in 2005, while shareholders’ equity increased to $13.19 in 2006 from $11.58 in 2005.

Watlington invests in pipelines