REG - Pennon Group PLC - Half Year Results 2023/24
29/11/2023 07:00
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RNS Number : 9808U Pennon Group PLC 29 November 2023
29 November
2023
Half Year Results 2023/24
Susan Davy, Group Chief Executive, commented:
Pennon has continued to make progress in the last six months on delivering for
customers and shareholders, improving operational resilience across the group
through an 87% step up in investment, supported by a healthy balance sheet. We
are executing on our twin track strategy of organic and acquisitive growth in
UK water, creating long term value and making progress on what matters most to
those across our regions.
I am very clear that if we serve our customers well, we serve our shareholders
well, which is why we are focused on improving environmental performance,
keeping bills as low as possible, developing new water resources, and
investing in renewable energy generation. This has helped us deliver a 100%
bathing water quality assessment for the third year running and reduce serious
pollution incidents this year, but we know there is more to do.
Our twin track strategy of both organic and acquisitive growth in UK water
ensures we continue to drive long term value, with the Bristol acquisition
benefits on track, alongside a growing portfolio of complementary services
delivered through our business to business retailers and growing renewable
energy business.
Everyone at Pennon and in our wider supply chain works relentlessly to make
change happen and I want to thank all my colleagues for their contribution to
these results. I also want to thank them in advance for what they are about to
do, as we look ahead to 2030, creating 2,000 new jobs in the region and
delivering a sustainable future for all.
FINANCIAL PERFORMANCE
H1 2023/24 H1 2022/23 Change
Underlying(^) revenue £448.6m £425.5m +5.4%
Underlying profit before tax £9.1m £22.5m (59.6%)
Non-underlying items before tax 1 (#_ftn1) (£5.9m) (£1.6m) -
Profit after tax £1.8m £18.5m (90.3%)
Earnings per share (EPS)
· Adjusted EPS(^) 3.6p 7.9p (54.4%)
· Statutory EPS 0.5p 7.0p (92.9%)
Dividend per share 2 (#_ftn2) 14.04p 12.96p +8.3%
· Statutory and underlying revenue up 5.4% driven by inflationary
tariff increases which are moderated through regulatory adjustments,
minimising the impact on customer bills. Pennon Water Services generating
ongoing revenue growth from contract wins outside of our wholesale supply
regions
· £9.1 million underlying profit before tax - reduction compared to H1
2022/23 due to higher inflation driven costs. Compared to H2 2022/23
underlying profit before tax improved, a trend expected to continue in to H2
2023/24
· Net non-underlying cost items before tax of £5.9 million - includes
one-off costs of business transformation, drought and renewable energy
acquisitions
· Statutory profit after tax of £1.8 million (H1 2022/23: £18.5
million profit after tax)
· Adjusted earnings per share of 3.6 pence, down from 7.9 pence in H1
2022/23
· Statutory earnings per share of 0.5 pence after net non-underlying
costs
· Delivering on established K7 (2020-25) dividend policy - interim
dividend per share up 8.3% (CPIH +2%) to 14.04 pence.
A full reconciliation to the statutory reported results is included in item
(i) in the Alternative Performance Measures on pages 67 to 70 of this
announcement.
Making progress, growing sustainably
Step up in investment across the Group
· Delivering on our organic and acquisitive growth strategy - on track
for 60% RCV growth to 2025 and c.100% 3 (#_ftn3) to 2030
· c.£1.6 billion K7 (2020-25) investment well underway - delivering
sustainable environmental improvements across our region - £234 million 4
(#_ftn4) regulated water business capital investment represents a 65% increase
on H1 2022/23
· Total Group investment increased by 87% v H1 2022/23
· Delivering on Bristol Water acquisition benefits - c.£16 million
annualised synergies to date.
Making progress on what matters most across our region
· 100% bathing water quality for the third consecutive year 5 (#_ftn5)
· Breaking the cycle of drought - reservoir levels more than doubled
compared to 2022 6 (#_ftn6) , on track to increase water resources across
Cornwall and Devon by 45% and 30% in K7
· Upper quartile performance for South West Water on industry
comparative performance metrics - one of only two companies to improve
performance in Ofwat rankings
· Targeted for 2023 to retain EPA performance gains delivered in 2022
(EPA 2* status) - remain focused on achieving 4* status for 2024
· Accelerating our Net Zero 2030 commitment - investing in renewable
energy generation - pioneering our Green First approach, promoting
nature-based solutions
· Supporting our customers and communities - unlocking over £90
million of customer support in K7 to date, keeping bills as low as possible
with below inflation increases to 2025.
Adopting a Green First approach
· Sector-leading catchment management ahead of target - supporting
improvements to water quality - 6% improvement in RNAGs to date in K7, from
19% to c.13%
· Renewable energy investment through Pennon Power Limited - current
investment of c.£145 million on track to generate 40% of Group energy
requirements, alongside reducing exposure to volatile global energy markets.
Underpinned by robust fundamentals
· Strong balance sheet - responsible, sustainable gearing at 61.0% -
broadly in line with Ofwat's notional company expectations
· Sector-leading financing portfolio - effective interest rate of 5.8%
driven by the Group's strategically positioned financing portfolio
· Robust returns - track record of RORE(^) outperformance - 7.9% 7
(#_ftn7) cumulative K7 Group RORE, reflecting a doubling of base returns.
Ambitious plan for K8 (2025-30) - the right plan for our regions
· Strong support from customers for our most ambitious plan to date -
74% customer acceptability following our most extensive engagement, with over
30,000 customers and 1,000 stakeholders engaged in the plan's development
· Investing in the areas that matter most - £4.5 billion totex plan
for 2025-30, assuming 12% efficiency, more than quadruples our K7 enhancement
capex to deliver benefits for customers, communities and the environment
· Transition underway to deliver on our ambitious plan - supply chain
mobilised with new contractors appointed
· Keeping bills as low as possible - 3-4% average increase per annum to
2030 across our regions
· Incentivising performance, with the potential of up to 8.6% return on
regulated equity
· Underpinned by responsible financing, with average gearing of 63.3%
over K8, within our well-established range of 55-65%
· Nominal RCV growth of 38% (real - 25%) to 2030 - delivering
sustainable growth.
Presentation of results
A presentation of these results hosted by Susan Davy, Group Chief Executive
and Paul Boote, Group Chief Financial Officer, will be available at 08:00am
(GMT), today, 29 November 2023 and can be accessed here:
www.pennon-group.co.uk/investor-information
(http://www.pennon-group.co.uk/investor-information) .
The presentation will be followed by a live Q&A conference call at 08:45am
(GMT). Details are included below:
United Kingdom (Toll-Free): +44 800 358 1035
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Conference passcode: 803418
For further information, please contact:
Paul Boote Group Chief Financial Officer 01392 443 168
Jennifer Cooke Group Head of Investor Relations
James Murgatroyd FGS Global 020 7251 3801
Harry Worthington
CHIEF EXECUTIVE'S REVIEW
Our focus remains on delivering our strategy of growth in environmental
infrastructure through organic investment and acquisitions, efficient delivery
of our services and leadership in UK water.
We are implementing our plans to 2025 that will deliver:
· 60% growth in RCV from 2020 to 2025, including c.20% delivered
through our recent acquisition of Bristol Water, and capital investment over
the period of c.£1.6 billion
· 135 GWh of renewable energy generation, through c.£145 million
announced to date to be invested in four acquired projects; and
· Continued double digit growth in the profitability of our B2B water
retail businesses.
Our largest investment programme in decades, coupled with our focus on
continual operational improvement will be crucial in the delivery of
environmental improvement and in achieving our 2025 business plan targets. For
South West Water, c.75% of ODIs are currently on track or ahead of target,
with this figure standing at c.70% for Bristol Water, with South West Water's
K7 cumulative ODI performance upper quartile.
Our cumulative RORE performance continues to be strong and at 7.9% represents
a doubling of base returns on regulated equity, driven by our strategically
positioned financing portfolio.
However, there remains more to do and we are committed to delivering on our
four key priorities.
Building water resources, diversifying our portfolio through innovation
With the hottest, driest weather on record last year, we have seen the impact
of climate change, intensified by population growth and tourism, putting
significant pressure on our water resources. We have been working at pace to
deliver supply and demand-side interventions, which are delivering results. In
comparison to 2022, our water resources have more than doubled 8 (#_ftn8) ,
with around a third of this increase driven by our investments, alongside a
45% increase in the level of rainfall. As a result we were pleased to have
been able to lift all hosepipe bans across the region in September.
We have delivered new water resource and water efficiency plans, including
reinvesting c.£125 million of outperformance to diversify and increase water
resources across the region. We have already made good progress by creating
new sources through repurposing quarries as well as developing new pipelines
and are on track to deliver Cornwall's first ever desalination plant next year
to improve resilience. Through our agile approach and investment, we are on
track to increase resource availability in Devon and Cornwall in K7 by 30% and
45%, respectively.
Alleviating storm overflows and eliminating pollutions
Storm overflows and pollutions have been at the forefront of the media,
public, regulators', and the industry's minds over recent years. Following the
successful rollout of monitors across 100% of our network of storm overflows
in 2022, our performance has been scrutinised not only by us, but by our many
stakeholders, and as a sector we committed to change. Noting the importance of
bathing water to our customers, the environment and the economy of the region,
we are pleased to have achieved 100% bathing water quality across the region
for the third consecutive year.
We are investing £100 million in our WaterFit plan to 2025, including £45
million of additional investment being funded by our outperformance. This plan
focuses on healthy rivers and seas and is targeting improvements at 49 of the
151 beaches across Devon and Cornwall, with over 70 schemes in progress or
completed to date to increase storm storage, introduce sewer separation and
divert flows with our Green First, nature-based approach. Alongside this, our
Pollution Incident Reduction Plan continues to deliver results, having
consolidated the improvements on pollutions, including serious pollutions -
with only one incident to date this year. Supporting these improvements is our
roll out of thousands of sewer depth monitors enabling proactive intervention,
alongside investment at rising mains and pollution incident 'hotspots' across
our network.
Driving environmental gains
Our pioneering catchment improvement programmes are delivering benefits across
80% of our catchments - with over 15 years of data and analysis, the science
is confirming the improvements that we are making to water quality. Our ground
breaking joint venture with the University of Exeter enables research into
solutions to some of the world's most pressing issues such as tackling
microplastics in the water cycle.
We are making good progress across all three pillars of our Net Zero 2030
strategy - sustainable living, championing renewables and reducing carbon
emissions, and anticipate a reduction of more than 50% in our carbon footprint
in K7. To date we have announced renewable energy investment of c.£145
million which will significantly contribute to the achievement of our Net Zero
2030 targets, and alongside smaller scale roll out of solar PV at our sites,
puts us on track to have secured 50% renewable energy generation by 2025, five
years ahead of our initial target. As we work to reverse carbon emissions, we
have improved over 115,000 hectares of land, representing around 80% of our
catchments, through activities including habitat and peatland restoration and
tree planting.
Supporting affordability
Our fourth priority is focused on ensuring we are able to support customers
who struggle to afford their bills. We know that it is critical that we
balance investing in our network infrastructure whilst ensuring that bills
remain fair and affordable for all. We have kept bill increases to a minimum
during the cost of living crisis, with increases for 2023/24 and 2024/25 below
the headline rate of inflation.
As a Group, we are different from others in the sector and have around 90,000
customer shareholders, following the second c.£20 million issuance of our
unique WaterShare+ scheme. We are doing more than ever to support customers
through the cost-of-living crisis, delivering more than £90 million of
benefits in K7 to date - at a time when many customers need it most.
Driving sustainable growth
Performance across the Group for the half year continues to be resilient, as
we deliver robust fundamentals, and execute our twin track growth strategy -
utilising both organic and acquisitive growth potential to drive long-term
sustainable growth. As we deliver on this strategy we expect to increase the
Group's RCV by c.100% over the period 2020-2030 9 (#_ftn9) .
Alongside this, our complementary investment in environmental infrastructure
through our Pennon Power renewable generation assets, will deliver attractive
commercial returns and contribute significantly to the Group's Net Zero 2030
target. Our announced investment to date of c.£145 million across four
projects will generate c.135 GWh, with the addition of two-hour 60 MWh battery
storage at our Dunfermline project. This investment will also benefit the
Group by reducing exposure to future volatility in wholesale power markets
that we have experienced this year and will provide commercial returns ahead
of those earned from our regulatory water business. The sites acquired have
the required consents in place and will see construction commence in 2024,
with the full portfolio of assets on track to contribute to Group earnings in
2025/26.
Our B2B businesses 10 (#_ftn10) , Pennon Water Services and water2business
continue to win contracts, driving strong financial performance and profits.
With a combined market share of 12%, they have some of the lowest customer
attrition rates in the market, and excellent customer service scores. Both
businesses are well positioned for future growth, and continue to win key
contracts, building on the continued double digit growth in their
profitability to date.
The strength of our balance sheet is illustrated by our responsible gearing at
61% which remains in line with Ofwat's notional company expectations, and
within our well-established range of 55% -65%, positioning us well ahead of
K8. Whilst our £2.8 billion capital investment plan for K8 is our most
ambitious to date, we have worked hard to ensure that we deliver this
investment responsibly, which is illustrated through our average gearing
across K8 forecast to remain within our well-established range of 55-65% at
c.63%, alongside keeping customer bills as low as they can be.
In many ways our plan to 2030 is also a 'no surprises' plan as we continue to
do what we said we would. It's a plan that goes further in tackling the
biggest challenges in our region, as we invest to protect water quality and
enhance resilience, tackle storm overflows at our beaches, eradicate
pollutions and protect the environment from climate change. With a laser like
focus on efficiency, it's also a plan that supports customer affordability -
balancing an extensive investment plan, whilst keeping bill increases to 3-4%,
per annum, across each of our regions. Over 30,000 customers and 1,000 local
stakeholders were directly engaged in the development of our plan, which is
why we believe is the right plan, and the right deal for our region.
Board Matters
As previously announced, Steve Buck was appointed to the Board on 27 November
2023, ahead of taking up the role of Chief Financial Officer and its
subsidiaries at the end of December 2023 following Paul Boote's decision to
step down from his role as Chief Financial Officer, as part of a planned
relocation away from the South West.
On 31 August 2023, Neil Cooper stepped down from the Boards of Pennon Group
plc and South West Water Limited. Iain Evans was appointed Senior Independent
Director of Pennon Group plc and South West Water Limited on 1 September 2023.
Following these Board changes, the Group reviewed its Committee membership,
Loraine Woodhouse replaced Neil as Audit Committee Chair and Iain Evans was
appointed a member of the Audit Committee.
In the Company's Annual Report and Accounts 2023, Gill Rider announced her
intention to step down as Chair of Pennon Group plc, at the close of the
Company's Annual General Meeting in 2024. A formal process for the Chair's
replacement is well underway.
Susan Davy
Group Chief Executive
28 November 2023
Financial Timetable
25 January 2024 Ordinary shares quoted ex-dividend
26 January 2024 Record date for interim dividend
08 March 2024 Final date for receipt of DRIP applications
25 March 2024 Trading Statement
05 April 2024 Interim dividend payment date
21 May 2024 Full Year Results 2023/24
10 June Annual Report and Accounts Published
2024
25 July 2024 Annual General Meeting 2024
25 July 2024* Ordinary shares quoted ex-dividend
26 July 2024* Record date for final dividend
08 August 2024* Final date for receipt of DRIP applications
05 September 2024* Final dividend payment date
26 September 2024 Trading Statement
28 November 2024 Half Year Results 2024/25
* Subject to obtaining shareholder approval at the 2024 Annual General
Meeting.
GROUP CHIEF FINANCIAL OFFICER'S OVERVIEW
Overall, the financial performance for H1 2023/24 is in line with management
expectations. As flagged previously, the impact of elevated inflation reduces
near term earnings with power prices remaining high, in part due to hedging at
recent higher prices. H2 2022/23 was impacted by the drought in the South
West, which resulted in increased levels of operating costs and capital
expenditure as we sought to address these challenges, which has continued in
H1 2023/24. The inflationary impact on finance costs is stabilising, in part
through the £300 million RPI swaps that were put in place in H2 2022/23.
Despite inflationary cost pressures, tariff increases have more than offset
these impacts and H1 2023/24 earnings are up compared to H2 2022/23.
Over the long term the elevated inflationary environment provides the Group
with additional growth in sustainable value with revenues and RCV linked to
November and March CPIH inflation, respectively.
The merger of South West Water and Bristol Water completed on 1 February 2023
with the combined water business now operating under one licence held by South
West Water Limited. Within this report, to aid comparability both now and
ongoing, the results of South West Water include the operating performance of
Bristol Water in both H1 2023/24 and the comparative period, H1 2022/23.
Underlying H1 2023/24 H1 2022/23 Change
Revenue £448.6m £425.5m +5.4%
Power (£55.2m) (£48.7m) (13.3%)
Operating costs (£224.9m) (£202.2m) (11.2%)
EBITDA(^) £168.5m £174.6m (3.5%)
Depreciation and amortisation (£82.6m) (£77.4m) (6.7%)
Operating profit £85.9m £97.2m (11.6%)
Net interest charge (£77.3m) (£74.7m) (3.5%)
Share of associated companies PAT £0.5m - -
Profit before tax £9.1m £22.5m (59.6%)
Non-underlying items before tax(1) (£5.9m) (£1.6m) -
Profit before tax £3.2m £20.9m (84.7%)
Underlying tax charge (£2.8m) (£2.7m) (3.7%)
Non-underlying tax credit £1.4m £0.3m -
Profit for the period £1.8m £18.5m (90.3%)
Earnings per share
Adjusted EPS(^) 3.6p 7.9p (54.4%)
Statutory EPS 0.5p 7.0p (92.9%)
Dividend per share - dividend policy(2) 14.04p 12.96p +8.3%
Capital investment(^)
Total Group £266.3m £142.6m +86.7%
South West Water £234.4m £142.5m +64.5%
Pennon Power £31.7m - -
Other £0.2m £0.1m +100.0%
30 September 30 September 2022
2023
Total Group net debt (£3,326.8m) (£2,877.8m)
The Group's statutory and underlying revenue has increased from £425.5
million to £448.6 million, an increase of 5.4%, with South West Water's
revenue increased by £14.0 million with inflationary tariff increases being
moderated through regulatory tariff adjustments, minimizing the impact on
customer bills. Pennon Water Services' revenue increased by £9.4 million,
with new contracts, predominantly outside South West Water's regions,
contributing c.£7 million to this increase.
Overall, underlying EBITDA has reduced 3.5% from £174.6 million to £168.5
million including the impact of higher power costs of c.£7 million on the
prior period.
Further details of the performance of South West Water and Pennon Water
Services is outlined below.
We recognise the pressure the ongoing elevated levels of inflation pose to our
customers and we remain focused on providing a broad range of affordability
measures to support those in financial need. Across all Group businesses, the
potential impact of significant increases in the cost of living on
affordability has been considered in assessing our expected credit loss
charges.
Cash collections across the Group have remained robust during the period.
Expected credit loss charges for H1 2023/24 of £3.3 million for South West
Water (0.9% of revenue) are in line with previous levels (H1 2022/23 1.1%).
For Pennon Water Services, the expected credit loss charge of £0.5 million
(0.5% of revenue) is also in line with previous levels (H1 2022/23 0.3% of
revenue).
The Group reported a statutory profit before tax of £3.2 million (H1 2022/23
profit £20.9 million) after non-underlying costs of £5.9 million (H1 2022/23
£1.6 million). Group underlying profit before tax decreased to £9.1 million
from £22.5 million in H1 2022/23. Whilst this outturn reflects a reduction in
earnings compared to H1 2022/23 it represents a marked improvement in
performance compared to H2 2022/23 where the impact of elevated power pricing
and financing costs resulted in a second half underlying loss before tax of
£5.7 million.
SOUTH WEST WATER
Since 1 February 2023, the trade and the significant majority of assets and
liabilities of Bristol Water plc were transferred to South West Water Limited
under a statutory transfer mechanism set out in the Water Industry Act. The
Bristol Water brand will continue as a trading name of South West Water. As
noted above the financial performance of South West Water includes the
performance of Bristol Water in both this half year and the comparative half
year.
South West Water underlying H1 2023/24 H1 2022/23 Change
Revenue £377.8m £363.8m +3.8%
Power (£55.2m) (£48.7m) (13.3%)
Other operating Costs (£155.5m) (£142.5m) (9.1%)
EBITDA £167.1m £172.6m (3.2%)
Depreciation and amortisation (£79.6m) (£74.8m) (6.4%)
Operating profit £87.5m £97.8m (10.5%)
Net interest charge (£80.9m) (£78.6m) (2.9%)
Profit before tax £6.6m £19.2m (65.6%)
Non-underlying items before tax (£5.4m) - -
Profit before tax £1.2m £19.2m (93.8%)
Statutory and underlying revenue of £377.8 million for H1 2023/24 has
increased by 3.8% compared with the prior period (H1 2022/23 £363.8 million).
The revenue growth of £14.0 million reflects inflationary tariff increases of
£30.8 million which have been moderated through the impact of regulatory
adjustments of £14.8 million, minimising the impact on customer bills, and a
small overall reduction in demand.
Underlying operating costs of £210.7 million increased by £19.5 million (H1
2022/23 £191.2 million). Power costs were up £6.5 million on the same period
last year as a result of recent higher power prices locked in through our
hedging strategy which de-risks the business from further increases in the
wholesale energy markets. The inflationary impact on power costs accounts for
£9.4 million of the increase with reductions achieved from efficient
consumption management. Whilst the rates of inflation are starting to reduce,
other operating costs have been impacted by higher levels of inflation,
notably in respect of employee wage inflation (c.£3 million) and the impact
of cost inflation across chemicals and other third party costs.
South West Water's underlying EBITDA reduced by 3.2% impacted by higher costs.
Underlying operating profit has reduced by 10.5% as our accelerated capital
investment programme starts to impact the depreciation charge which has
increased by £4.8 million compared to the same period last year.
The net interest charge of £80.9 million is £2.3 million higher than prior
year (H1 2022/23 £78.6 million).
South West Water's capital expenditure was £234.4 million, an increase of
£91.9 million (64.5%) on the prior year (H1 2022/23 £142.5 million), due to
our commitment to accelerate investment across priority areas of water
resources, water quality, pollution reductions and storm overflows.
In drinking water, £150.2 million expenditure has been incurred, with
investment focused on enhancing water resources with investment in new
abstraction points, links between key supply sources and work on Cornwall's
first desalination plant is underway. Additionally, investments in drinking
water quality through granular activated carbon (GAC) schemes and ongoing work
on the Alderney water treatment works in Bournemouth are being delivered.
In wastewater, overall capital expenditure of £84.2 million has been focused;
on deployment of sewer level monitoring technology, to support proactive
identification of issues to prevent pollution incidents; targeted
environmental improvements in line with our WINEP profile; and increased
expenditure to optimise wastewater treatment works at key strategic works
serving the region's major cities of Plymouth and Exeter.
PENNON WATER SERVICES
Pennon Water Services - statutory and underlying H1 2023/24 H1 2022/23 Change
Revenue £117.6m £108.2m +8.7%
Water segment wholesale elimination (£46.7m) (£46.7m) -
Revenue excluding elimination £70.9m £61.5m +15.3%
Operating Costs 11 (#_ftn11) (£114.5m) (£105.9m) (8.1%)
Water segment wholesale elimination £46.7m £46.7m -
Operating costs excluding elimination (£67.8m) (£59.2m) (14.5%)
EBITDA £3.1m £2.3m +34.8%
Depreciation and amortisation (£0.3m) (£0.4m) +25.0%
Operating profit £2.8m £1.9m +47.4%
Net interest charge (£1.1m) (£0.8m) (37.5%)
Profit before tax £1.7m £1.1m +54.5%
Pennon Water Services has delivered a robust financial performance for the
half year through its focus on key strategic initiatives of growing through
long term contracts in targeted business sectors, good customer retention and
strong control of operating costs despite additional cost pressures.
Non-household demand has fallen due to restrictions within our underlying
water region, however year on year revenue, EBITDA and PBT have continued to
grow in the first half of 2023/24.
The overall impact on revenues for Pennon Water Services, including the impact
of new contract wins, is an increase of c.9% compared to the prior year. New
business wins have contributed £7.3 million of additional revenue compared to
the same period last year, with inflation (net of customer attrition)
contributing further to the increase.
Underlying operating costs have grown marginally behind improving revenues and
the business has improved its underlying EBITDA by c.35% to £3.1 million (H1
2022/23 £2.3 million). This strong performance has resulted in the business
reporting a profit before tax of £1.7 million (2022/23 £1.1 million), an
increase of c.55%.
The business continues to maintain its focus on targeting high quality,
sustainable customers who will benefit from the value-added services that form
part of Pennon Water Services' differentiated service proposition, with new
annualised contract wins of c.£2.8 million secured during the year.
Group net finance costs
Total net finance costs for the Group of £77.3 million are £2.6 million
higher than last year (H1 2022/23 £74.7 million). The non-cash element of our
finance charges, which accretes to the debt principal, was c.£29 million (H1
2022/23 c.£39 million).
There were no non-underlying finance costs in H1 2023/24 or H1 2022/23
although a non-underlying gain of £18.4 million was recognised in the second
half of 2022/23 being the gain resulting from the repayment of the Bristol
Water plc index-linked bond due 2041.
The outturn reflects the actions taken in H2 2022/23 where the Group reduced
its proportion of index-linked debt by repaying the Bristol Water plc
index-linked bond due in 2041 and entered into £300 million of RPI to fixed
rate swaps to fix the interest charge over the period to 2025, smoothing the
impact of inflation over 2023 to 2025. These changes have helped to manage the
Group's exposure to volatility in finance costs experienced in particular last
year and have proven well founded as the rates of inflation have remained
higher than external inflation forecasts initially expected.
Following the changes made last year, c.15% of South West Water's debt is
currently index-linked, a relatively low proportion compared to the industry
average. Whilst the recent reductions in inflation have generated some benefit
for overall finance costs, these have been offset by the increasing rates on
our floating rate debt and the impact of increased levels of borrowing to
support our accelerated capital investment programme. The index-linked
proportion of debt has historically been maintained at a relatively stable
proportion of c.25% and is expected to return to this level by March 2025.
Overall, the efficient funding mix and hedging strategy has resulted in an
effective interest rate of 5.8% (H1 2021/22 5.8%) for South West Water.
The Group continues to efficiently secure funding for South West Water through
its Sustainable Financing Framework and to ensure c.60% of its interest rate
risk is mitigated in line with the Group treasury policy, which is achieved
through issuing both fixed rate debt and effective interest rate hedging, with
a further element being index-linked.
In H1 2023/24, South West Water completed its first syndicated private
placement transaction with the company receiving £300 million to support the
ongoing K7 business plan projects. This issuance signals the move to more
benchmark sized transactions as the capital expenditure and ongoing
refinancing continues to increase following the integration of Bristol Water.
Share of post-tax profit from associated companies
As part of the acquisition of Bristol Water in June 2021, the Group obtained a
30% interest in Water 2 Business Limited (W2B), a water retailer joint venture
with Wessex Water. This investment is accounted for under the equity method
and following a period of losses as the business reached scale, we are pleased
to recognise £0.5 million of profit after tax from our associated company,
Water2business, in H1 2023/24 results (H1 2022/23: £nil).
Non-underlying items and acquisition accounting
Non-underlying items for H1 2023/24 total a charge before tax of £5.9 million
(H1 2022/23 charge of £1.6 million). Non-underlying items are those that in
the Directors' view should be separately identified by virtue of their size,
nature or incidence and where they believe excluding non-underlying items
provides a more useful comparison of business trends and performance.
The non-underlying charge of £5.9 million consists of:
· In financial year 2022/23, a combination of elevated demand from
increased tourism and record-breaking extremes of prolonged dry and hot
weather led to extremely low water storage levels in the Cornwall region.
Drought permits were issued allowing increased extractions and water-saving
measures for the South West Water region were issued for the first time since
1995. To ensure the region could be supplied with water over the summer and
continuing into 2023, South West Water instigated a series of mitigating
measures and one-off expenditure to secure water resources. c.£17 million of
costs (including customer incentives) to address the severe drought conditions
were recognised in H2 2022/23. In H1 2023/24, a further £1.8 million of
specifically identifiable costs have been incurred to address these specific
issues.
· £3.6 million of costs in connection with the business transformation
of South West Water following the merger of Bristol Water into South West
Water.
· £0.5 million of expenses in connection with the acquisition of four
renewable power generation investments.
The non-underlying charges in H1 2023/24 give rise to a net tax credit of
£1.4 million in relation to the above items.
Responsible approach to tax
Once again, the Group is pleased to confirm it has maintained the Fair Tax
Mark accreditation for the year, having been the first water company to
achieve this status. This is the sixth year in succession that the Group has
been awarded the accreditation and we are proud of our responsible approach to
tax.
The overall H1 2023/24 tax charge for the Group is £1.4 million (H1 2022/23
charge of £2.4 million). On an underlying basis, the net tax charge for H1
2023/24 for the Group of £2.8 million (H1 2022/23 charge of £2.7 million)
consists of:
· Current tax credit of £0.6 million, reflecting an effective tax
credit rate of (6.6%) (2022/23 charge of £1.5 million, 6.7%). The reduction
in rate is due to the Group generating tax losses all of which are carried
forward for future relief. These tax losses reflect the enhanced capital
allowances available as a result of full expensing and first year allowances,
along with pension payments made during recent years where tax relief is now
due. Around 50% of the group's capital additions qualify for enhanced capital
allowances. The £0.6m current tax credit relates to prior year adjustments in
respect of additional interest deductions due in accordance with UK tax
legislation.
· Deferred tax charge of £3.4 million (H1 2022/23 charge of £1.2
million). This primarily reflects a current year deferred tax charge in
relation to capital allowances in excess of depreciation charged across the
Group, largely due to full expensing, offset by tax losses carried forwards
for utilisation in later periods. It also includes a deferred tax charge in
respect of prior years of £0.8 million in relation to interest deductions.
There is also a non-underlying deferred tax credit of £1.4 million in H1
2023/24 relating to the non-underlying items set out above. This relates to
losses carried forward for utilisation in later years.
Full expensing deductions which originally applied for the three years from 1
April 2023 to 31 March 2026 together with 50% first year allowances on long
life assets and integral features, have both been made permanent in the recent
Autumn Statement. Given the Group's continued capital investment programme,
these changes mean that the Group does not expect to generate taxable profits
for the foreseeable future, and therefore does not expect to make any
corporation tax payments during this time.
Earnings per share
The Group has recorded a statutory profit per share of 0.5 pence per share for
the six months ended 30 September 2023 (H1 2022/23 earnings of 7.0 pence per
share). This includes a net non-underlying charge before tax of £5.9 million
and a net non-underlying deferred tax credit of £1.4 million.
Our adjusted earnings per share excludes the impact of deferred tax charges
and non-underlying items. For the Group, we have generated adjusted earnings
per share for H1 2023/24 of 3.6 pence (H1 2022/23 7.9 pence), with the
enduring elevated levels of inflation impacting near term earnings. Despite
this reduction in earnings compared to H1 2022/23 it represents a marked
improvement in performance compared to H2 2022/23 where the impact of elevated
power pricing and financing costs resulted in a second half adjusted earnings
per share of 0.3 pence.
Net debt position is sustainable
The Group's cash flow from operating activities for H1 2023/24 was £88.8
million (H1 2022/23 £160.2 million). Cash collections have remained robust
and we continue to monitor cash collections closely and are focused on
providing a broad range of affordability measures to support those in need of
support. The reduction in operating cashflow reflects the cyclical impact of
the working capital cycle which will naturally reverse during H2 2023/24
alongside the cash impact of our Watershare+ and Stop the Drop bill credits
which were recognised in H2 2022/23.
Net interest payments were £45.5 million (H1 2022/23 £93.3 million) with the
comparative for H1 2022/23 including £51.5 million of interest paid on lease
settlements relating to interest accreted to the lease principal. As noted
above, c.£29 million (H1 2022/23 c.£39 million) of the income statement
finance charges arises from our index-linked debt, and is non-cash, as the
indexation element accretes to the debt principal repayable on maturity.
Our accelerated environmental investment programme has resulted in an increase
in capital investment cash outflows of £114.9 million to £270.3 million (H1
2022/23 £155.4 million). This includes c.£23 million of cash outlay on our
renewable investments through Pennon Power, being c.£30 million total capital
outlay net of agreed deferred payments.
Other significant movements in net debt in H1 2023/24 include payment of our
interim and final dividends for 2022/23 (£111.7 million) and £14.4 million
of non-cash indexation on our loan instruments. Other movements of £8.3
million arise in the main from cash payments for the acquisition of own shares
by the Pennon Employee Share Trust, and the unwind of fair value adjustments
on debt from previous acquisitions.
The Group's IFRS net debt at 30 September 2023 was £3,326.8 million (31 March
2023 £2,965.4 million). This includes fair value adjustments on acquired debt
of £118.1 million(( 12 (#_ftn12) )) which are released over the life of the
related debt instruments. The Group's net debt position excluding these
adjustments is £3,208.7 million.
Efficient and responsible financing
Since 31 March 2023, the Group has secured c.£710 million of new and renewed
facilities, including:
· Our first syndicated £300 million private placement with an average
maturity of 12 years
· £50 million of new term loans and leasing with an average maturity
of 9 years
· £100 million bilateral facility to support Group investments
· £25 million 20 year Private placement
· £235 million of new and renewed revolving credit facilities.
We look to raise all new and renewed facilities under our Sustainable
Financing Framework.
The Group took steps during the previous financial year to re-balance the
proportion of index-linked debt to align with previously maintained levels for
the longer-term. Whilst the current level is around 15% we expect this to
increase back to 25% by March 2025.
Resulting from the changes above and drawing of new debt during the year,
South West Water 13 (#_ftn13) gross debt at 30 September 2023 was £3,149
million (31 March 2023 £2,918 million). The debt has a maturity of up to 34
years with a weighted average maturity of 14 years.
At 30 September 2023, South West Water's(13) net debt to RCV ratio 14
(#_ftn14) stood at 61.0% (31 March 2023 60.8%). This is broadly in line with
Ofwat's notional structure of 60%.
South West Water's cost of finance, with an effective interest rate in H1
2023/24 of 5.8% remains among the lowest in the industry, continuing to
benefit from the diverse portfolio of debt.
Financing portfolio strategically positioned
The Group has a strong liquidity and funding position with £544 million of
cash and committed facilities as at 30 September 2023. This consists of cash
and cash deposits of £94 million (including £22 million of restricted funds
representing deposits with lessors against lease obligations) and £450
million of undrawn facilities.
South West Water(13) net debt at 30 September 2023 is a mix of fixed / swapped
(£2,146 million, 69%), floating (£525 million, 17%) and index-linked
borrowings (£420 million, 14%), which reflects our diverse debt portfolio and
compares to an industry average 15 (#_ftn15) of fixed / swapped 40%, floating
7% and index-linked 53%. New debt raised during this regulatory period has
been fixed to align to iBoxx indices in line with Ofwat's approach to allowed
cost of debt. Where appropriate, derivatives are used to fix the rate on
floating rate debt.
As we progress through the remainder of K7, we expect the mix of our debt
portfolio to evolve and are strategically targeting index-linked debt to
represent 25% of our portfolio in the long term. This will enable the Group to
maintain its financing flexibility, whilst remaining within our treasury
policy of at least 60% fixed rate debt.
As the Group continues to grow through capital investment in our
infrastructure so will our funding requirements. In the coming years, we
expect the Group to manage its portfolio with larger, and more diverse debt
instruments, taking advantage of the public ratings once established, by 2025
at the latest, in line with Ofwat's final PR24 methodology requirements.
The Group will require c.£1 billion in new funding by March 2025 to meet K7
and new business opportunities through the renewables business whilst also
providing c.£300 million in readiness for the new K8 period.
We will continue to maintain a diverse portfolio of debt to support
flexibility and growth opportunities. In the long-term this investment will
provide returns though K8 revenues and a higher RCV. We now expect RCV to
reach £5.4 billion at the start of K8.
Financial resilience - well positioned for PR24
April 2025 will see the start of the new regulatory period K8 with an increase
in the investment requirement to meet more investment programme designed to
address the new and more stringent environmental regulation.
The Group has always operated broadly in line with Ofwat's historical range of
notional company expectations. To provide flexibility to react to market
challenges and maintain a gearing level to support this, a range of between
55% and 65% has been targeted in the past and the K8 business plan expects to
remain within this established range with an average of c.63% anticipated.
The K8 business plan will be funded through additional debt, utilising our
diverse portfolio through our key bilateral relationships and raising c.£2.5
billion through additional opportunities in the private placement and public
bond markets. This overall funding requirement includes c.£700 million of
refinancing.
Contingencies
Ofwat and the Environment Agency announced an industry-wide investigation into
sewage treatment works on 18 November 2021. In June 2022, as part of its
ongoing investigation, Ofwat announced enforcement action against South West
Water Limited, alongside the five companies which received enforcement notices
in March 2022.
On 23 May 2023 Ofwat announced an investigation into South West Water's
2021/22 operational performance data relating to leakage and per capita
consumption. This operational performance data was reported in South West
Water's Annual Performance Report 2021/22.
All company data is subject to extensive process checks, which include both
internal and external assurance. All data disclosed in South West Water's
Annual Performance Report is subject to rigorous checks and balances carried
out by South West Water's external technical auditor.
The company continues to work openly and constructively with regulators to
comply with the formal notices as part of these ongoing investigations by
engaging and providing information as required.
Pensions
At 30 September 2023, the overall surplus on retirement obligations of £0.3
million compares to a surplus of £29.3 million at 31 March 2023.
The overall reduction of the surplus in H1 2023/24 of c.£29 million, which
relates to the Group's principal pension scheme, Pennon Group Pension Scheme
(PGPS), reflects:
· £15 million net reduction in surplus from the net under performance
in asset values compared to reductions in liabilities, from the increasing
discount rate, reflecting ongoing market volatility
· £14 million reduction in surplus with the change in other actuarial
assumptions reflecting the impact of inflation on immediate term pension
increases, and other changes in actuarial assumptions from the March 2022
triennial valuation.
The triennial valuation of PGPS as at 31 March 2022 was finalised in March
2023 and no deficit recovery contributions were required. The ongoing funding
requirements for the Company to the scheme are limited to the continuing
administration expenses.
The overall surplus includes a net surplus of c.£7 million relating to the
Bristol Water Section of the Water Companies Pension Scheme (WCPS) which
remains largely unchanged as the liabilities of the scheme are fully insured
through a bulk annuity policy. The surplus recognised is restricted by a tax
deduction of 35% under UK tax legislation. The trustee of WCPS is in working
through the process to wind up the Bristol Water section of WCPS and has
indicated its intention to return the surplus to the Company.
Dividends
The Group continues to strive to deliver on its commitments to customers,
shareholders and stakeholders as our investments drive strong and sustainable
results. Over half of Pennon's shareholders are UK pension funds, savings,
charities and individuals with almost half of the Group's employees, now
including Bristol Water, also being shareholders. Following the second
issuance of our unique WaterShare+ initiative, customers now make up more than
four times the number of institutional shareholders.
Pennon's 2020-2025 dividend policy of growth of CPIH +2% reflects the Board's
ongoing confidence in the Group's strategy and is underpinned by continued
RORE outperformance in South West Water.
For H1 2023/24 the Board has declared an interim dividend of 14.04 pence,
representing an increase of 8.3% on H1 2022/23 (H1 2022/23 interim dividend of
12.96 pence). The interim dividend will be paid on 5 April 2024 to
shareholders on the register on 26 January 2024. Pennon offers shareholders
the opportunity to invest their dividend in a Dividend Reinvestment Plan
(DRIP).
Investing for sustainable growth - renewable energy generation
In line with both our long-term sustainable growth strategy in UK
environmental infrastructure and our desire to accelerate on our Net Zero
target by 2030, we have allocated up to £160 million for investment in
renewable energy generation. This strategy will also benefit the Group by
reducing our exposure to future volatility in wholesale power markets, that we
have experienced throughout calendar years 2022 and 2023, and will provide
commercial returns ahead of those earned from our regulatory water business.
To date, Pennon Power Limited, a direct subsidiary to Pennon Group plc, has
acquired the rights to build three solar farms and one co-located solar and
battery storage site in the UK with a total initial capital outlay of c.£30
million. Specifically these investments include:
· A c.40 GWh site co-located solar and battery storage site in
Dunfermline, acquired in May 2023. This is an attractive ready to build site,
with consents in place, with total build costs expected to be c.£60 million.
Generation is expected to commence in calendar year 2024.
· A further three sites, located in Aberdeenshire, Cumbria and
Buckinghamshire, acquired in July 2023. These sites, with total anticipated
build costs of c.£85 million, are expected to generate a further 96 GWh, and
are targeted to be operational across calendar year 2025.
Pennon continues to identify further opportunities to enable further renewable
generation. The generating capacity of our investments to date equates to
around c. 40% of our electricity usage and contribute significantly towards
our target of 50% self-generation.
Financial outlook
Overall, our underlying results for the Group for the full year are expected
to be H2 weighted. Seasonal demand patterns and continued focus on promoting
water efficiency are expected to reduce revenue. Operating costs in H2 2023/24
are anticipated to reduce with power costs falling as a result of both
price 16 (#_ftn16) and usage, as our activities to address immediate water
resilience challenges are more H1 focused coupled with the realisation of
efficiencies that have been implemented in the first half of the year. We
expect the costs of implementing integration of South West Water and Bristol
based operations alongside operational improvements to continue with
non-underlying implementation costs of c.£10 million to be incurred in H2.
Financing costs are expected to be evenly profiled over the year.
The step up in our capital investment programme is expected to continue with
overall capital expenditure of financial years 2023/24 and 2024/25 anticipated
to be over £850 million, an increase of £100 million on the guidance given
at the time of our FY 2022/23 results of over £750 million. The additional
investment will ensure we are well positioned to deliver on our commitments
outlined in our draft business plan for K8 and across our commitments across
priority areas of water resources, water quality, pollution reductions and
storm overflows.
Overall, these impacts are expected to result in improvements in near-term
earnings and, in the longer term, the elevated inflationary environment
provides the Group with additional growth in long-term sustainable value, with
revenues and RCV linked to November and full year average inflation,
respectively. Shadow RCV at 31 March 2025 is forecast to be £5.4 billion,
reflecting growth of c.60% during K7.
Looking beyond the current financial year to 2024/25, we expect overall
revenues to increase with the combined impact of inflation on our 2024/25
tariffs (net of the year-on-year impact of regulatory adjustments and ODI
penalties) and ongoing expected growth in our non-household retail business.
We recognise the pressure that inflationary pricing increases may pose to our
customers, and customer bill affordability continues to remain a key
consideration for us. Our broad range of affordability measures ensures we are
able to support those in need of support, and we continue to focus on
delivering improvements efficiently and effectively.
Overall group operating costs in 2024/25 are expected to remain broadly flat
with softening power prices, the associated impact on other costs and
implementation efficiencies being offset by increasing wholesale water costs
outside of our region from increased activity in PWS.
OPERATIONAL REVIEW
Making progress on what matters most across our regions
Building water resources, diversifying our portfolio through innovation
Diversifying our water resources is critical to building resilience across
Devon and Cornwall, and ensuring a continuous supply for our customers, as we
navigate the ever-increasing impact of climate change. Our target to 2025 is
to increase water resources available in Cornwall by c.45%, and in Devon by
c.30%, which is being delivered through our reinvestment of c.£125 million,
and we are well underway in delivering on these targets and breaking the cycle
of drought.
All hosepipe bans in place across the region were lifted in September 2023,
with total reservoir storage at 64% more than double where it was at the same
time last year. In October 2023, the Environment Agency removed the official
drought status declared for the South West over fourteen months earlier in
August 2022, with the region now classified as in 'recovery'. In Cornwall,
where reservoir levels fell to their lowest ever levels in 2022, we are now on
track to achieve 90% reservoir capacity by 31 March 2024, before we head into
the summer season.
Alongside the numerous interventions already delivered, including the
expansion of the treated water network in Cornwall, and repurposing quarries
including Hawks Tor, Blackpool Pit, a water filled clay pit near St Austell,
is now around 55% complete. Over 50% of the new 21km pipeline connecting this
resource with Colliford reservoir is now in place, and we are on track to
bring this asset online in early 2024. Once in place, Blackpool Pit will
provide up to 12 Ml/day and bring the total increase to date in water supplies
in Cornwall to 35%.
Further resilience ahead of 2025 will also be delivered through the
development of Cornwall's first desalination solution. This will be a modular,
scalable, and permanent plant located adjacent to Par Docks. Extensive design
and development work is underway to minimise any environmental impact,
including utilising directional drilling and sympathetic pipeline locations to
protect the marine and terrestrial environment. Alongside this, hydro-electric
energy recovery solutions have been incorporated at both the intake for the
works, and the input to Restormel water treatment works to maximise energy
efficiency. We are progressing through early contractor involvement with a
view to signing a design and build, and operation and maintenance joint
contract to cover a 20-year period. We anticipate that the site will be fully
operational in 2024, ensuring we enter K8 with a robust, and diversified
portfolio of water resources.
In Devon, schemes to further augment the network, enabling the transfer of
water across strategic resource zones is now underway. Work on a new winter
pump storage scheme at Gatherley is c.20% complete and on track for completion
in early 2024, and at which point supplies in Devon will have increased by 30%
- a year ahead of our initial target.
Alongside extensive supply side interventions, our focus on demand-side
initiatives has supported a reduction in demand of 3.8% over the 2023 summer
season. We have also seen a 65% increase in free leak repairs, and have issued
almost 250,000 water saving devices over the last 18 months. Our Green
Recovery smart metering pilot programme across our North Devon supply area is
progressing well with smart meters now installed at one third of homes,
helping customers to more effectively manage their water use and save money.
Leakage remains a key area of focus as we work to further reduce the volume of
water lost across our network, and our leakage reduction plan remains on
track. We have increased our use of network monitoring and artificial
intelligence to help pinpoint areas of focus, and continue to repair around
2,000 leaks each month.
Prioritising water quality
Our teams continue to work around the clock to ensure that water quality is
maintained, delivering on our 'Quality First' principles, ensuring customers
receive a continuous supply of clean, safe drinking water. These principles
have been embedded into our everyday operations across the water business. We
continue to deliver rapid improvements under our 'Quality First'
transformation programme, and following the merger completion earlier this
year, we have extended the scope to the Bristol Water region. Improvements are
focused on both embedding cultural changes through training, coaching and
ongoing support, along with enhanced operational activities - including tank
cleaning and inspection, maintenance and resilience of treatment facilities
and water quality monitoring, control and investigations.
For South West Water, ensuring quality and compliance is a key underpin, and
we have consolidated our top quartile water quality position for Devon,
Cornwall and Bournemouth regions. Following the lifting of official drought
status for the South West in October, we are enhancing our network flushing
activity which was temporarily reduced as a result of the drought conditions.
Alongside this, schemes to provide multiple water quality benefits at
Stithians water treatment works will be completed in the spring of 2024, and
at Littlehempston a similar scheme will be completed in the spring of
2025. These two major treatment upgrades will benefit around 200,000
consumers in West Cornwall and the South Hams. On the Isles of Scilly, we are
delivering a step change in performance, and in the Bristol Water region
robust action plans are in place to improve legacy water quality performance.
Alleviating storm overflows and eliminating pollutions
2023 marks the third consecutive year that South West Water has achieved 100%
bathing water quality, as independently measured and reported by the
Environment Agency. We launched our £100 million WaterFit programme in April
2022 and over the last 18 months we have made significant strides in
delivering on our commitments, with over 70 interventions already underway or
complete across 49 of the 151 bathing beaches in the South West. We have
invested to upgrade works to enhance river water quality, deliver 100% bathing
water quality all year round, and increased our network capacity to reduce
storm overflow releases into waterways to achieve no more than 20 releases per
asset, per year by 2025. Following the installation of monitors across 100% of
our storm overflows in 2022, operability of these assets is now at 98%
following our ongoing programme of calibration.
As a direct result of the interventions made to date c.10% of storm overflow
releases have been avoided through investments including storm tanks, reducing
ground water ingress and operational enhancements which have removed 43 of the
top spilling sites from 2022. Following the drought in 2022, we have
experienced a 45% increase in rainfall and therefore we anticipate an increase
in the number of releases from storm overflows in 2023, however, we are
forecasting an improvement on 2021, where a comparable level of rainfall was
experienced.
We have an action plan in place to achieve our 2025 target of an average of 20
releases per asset, per year, and expect incremental improvements in
performance as we head into 2024 where the full year benefit comes into effect
for many of the interventions delivered to date. This includes:
· Adding over 6,000m(3) additional capacity to the network ahead of K8.
Of the 58 schemes to deliver this, 19 are already complete, and a further 21
are scheduled for completion ahead of 31 March 2024
· Reducing and diverting groundwater ingress at 30 key wastewater
treatment works and six sewer separation projects
· The delivery of 15 wastewater flow schemes in K7, with 6 delivered to
date, as well as maximising flows at our smaller sites
· Delivering 43 bathing and shellfish water schemes across the region,
with almost 90% of these interventions delivered to date, supporting the
delivery of 100% bathing water quality.
We are committed to sharing information openly and undertaking transparent
reporting with all our customers and stakeholders. Our WaterFit Live website
already provides reporting on our storm overflows operating near bathing
waters across our regions. We will be increasing our transparency by providing
near real time information across all our storm overflows by the end of the
year, not just on our coastal storm overflows, but also inland on our rivers,
ensuring customers and stakeholders can access accurate, open data about the
performance of our network.
Improving river water quality
Our teams are utilising extensive expertise in delivering coastal water
improvements to shape the delivery of our river water improvements, including
our 3-year bathing water quality pilots on the rivers Dart and Tavy. Monitors
on these rivers have now been in place for the last 18 months, and we have
supported applications on both rivers for bathing water status.
We are making good progress in reducing the impact that our assets have on
river water quality by one third ahead of 2025, having improved RNAGs 17
(#_ftn17) from 19% to c.13% 18 (#_ftn18) over K7 to date. Alongside the
benefits delivered through our wider WaterFit programme of interventions, we
have delivered six schemes of a programme of 33 to reduce phosphorous
levels.
Tackling pollution incidents
Since we launched our Pollution Incident Reduction Plan in 2020, we have
delivered a reduction in wastewater pollutions of c.50%, and further improved
our serious pollutions performance with only one event to date in 2023. We
have delivered an 18% reduction in external sewer flooding incidents year on
year, and achieved our lowest number of internal flooding incidents,
supporting our continued sector-leading performance. Alongside this,
performance on sewer collapses and sewer blockages is tracking ahead of our
performance targets, but we still have further to go. Whilst total pollution
numbers for 2023 are slightly elevated on 2022 performance, we have dynamic
plans in place to deliver the trajectory of improvements required to achieve
our 2024 target. Some of the key aspects of the plan to support this include:
· Investing to make improvements to wastewater pollution 'hotspots' -
with a total of 355 interventions carried out to date in K7 on assets and
areas identified as at risk
· Carrying out interventions on 36 rising mains across the region, with
60% of this programme now complete
· Rolling out 9,000 sewer depth monitors across c.23,000km of our sewer
network in K7 - with 75% completed to date, providing visibility of network
performance to reduce blockages, and enabling proactive identification and
intervention
· Deployment of region-wide predictive network burst detection
technology
· Rolling out telemetry across 100% of our pumping stations and
improving alternative power supplies at 150 pumping stations
· Embracing the use of artificial intelligence and predictive
technology to map catchments and target interventions, and utilising asset and
weather data to predict potential pollution risks.
Through our innovative partnership with the University of Exeter, we continue
to utilise the Centre for Resilience, Environment, Water and Waste (CREWW) for
root cause analysis, with this insight helping to shape our plans now, and
into the next regulatory period.
As reported in July 2023, we achieved an improved EPA rating from the
Environment Agency for 2022, having moved from 1* to 2* status. We know that
we still have further to go and remain committed to delivering on our
extensive improvement plans in this area. For 2023, we are targeted to retain
the EPA performance gains delivered in 2022 (EPA 2*), and we remain focused on
achieving our target of 4* EPA status for 2024.
Driving environmental gains
Our Net Zero 2030 plan is well underway across the Group. We expect to reduce
our carbon footprint by 50% in K7, and with c.40% 19 (#_ftn19) delivered to
date we are making excellent progress towards this target. In line with our
commitment to reducing carbon emissions across the Group, we have now
submitted our Science Based Targets for external validation.
The Group's investment in renewable energy generation supports the achievement
of our Net Zero strategy and is aligned with the Group's long-term sustainable
growth strategy in UK environmental infrastructure. To date, investment of
c.£145 million has been announced in four projects across the UK, generating
up to 135 GWh, along with two hours battery storage providing 60 MWh. When
combined with the smaller scale on-site solar generation roll out, this puts
the Group on track to have secured c.50% of its energy from renewable sources
from 2025.
This strategy will also benefit the Group by reducing our exposure to future
volatility in wholesale power markets that we have experienced this year, and
will provide commercial returns ahead of those earned from the regulatory
water business. The sites, acquired by Pennon Power Limited, a direct
subsidiary to Pennon Group plc, have the required consents in place and will
see construction commence in 2024, with grid connection for the full portfolio
in 2025.
Spotlight on catchment innovation
Our long-established partnership working approach across the region targets a
range of environmental benefits through our nature-first approach to
investment to enhance biodiversity and increase community engagement. This
science-based approach is supported through significant in-house expertise
alongside our partnership with the University of Exeter in the Centre for
Resilience in Environment, Water and Waste (CREWW) - a beacon of innovation.
To date, this approach has improved the management of over 115,000 hectares of
land to date, equivalent to over 80% of our catchments being improved. We
remain on track to improve 123,000 hectares by 2025, working closely with
partners, including Natural England, National Trust and South West Lakes Trust
to deliver initiatives across the South West including Exmoor, Dartmoor and
Bodmin Moor. We have restored over 1,100 hectares of peatland to date, of
which over 350 hectares contribute directly to of our Net Zero commitment to
restore a further 1,000 by 2030, in addition to our existing plans. 220,000
trees have been planted so far in K7 towards our target of 250,000 by 2025.
These benefits have been delivered alongside 20 businesses, charities and
local authorities on over 2,000 farms to date. As a result of these
initiatives, we have seen a 30% reduction in discolouration from peatland,
increased the water table by the equivalent of over 100 Olympic sized swimming
pools, and reduced phosphates in Drift reservoir by 40% in two years.
Underpinning our drive for continuous improvement is our work with CREWW.
Catchment focused innovation currently being trialled includes the use of
pioneering satellite data to understand habitat condition across the region,
using local sheep wool to create bunds for peatland restoration and trialling
new planting to improve soil health and water quality.
Supporting affordability
We continue to work hard to deliver quality services efficiently, so that
bills remain as low as possible. In all the areas we serve, average bill
increases for 2023/24 were kept well below the headline rates of inflation
(South West Water - 0.8% and Bristol Water - 5.5%), and bill increases for
2024/25 will continue to be below inflation. We remain committed to
eliminating water poverty in our region and are making excellent progress
towards this with 97% of South West Water customers and 100% of Bristol Water
customers citing their bills as being affordable.
Through our extensive package of affordability and vulnerability measures
across the water businesses, including specific tariffs and income
maximisation schemes, we have unlocked over £90 million 20 (#_ftn20) of
customer support to date in K7, and have plans to further increase this over
the remainder of the regulatory period. Over 120,000 customers are now
benefiting from one or more of our support tariffs, and we have seen an
increase of 35% in customers benefiting from our social tariffs, in comparison
to H1 2022/23.
Alongside the financial support we provide, we work closely with a range of
independent organisations and debt partners - with over 170 partnerships
established to date who continue to be key in promoting the range of help
available to customers.
To ensure our bills fairly reflect costs across our diverse customer base, and
to ensure we keep bills as low as possible, we will be launching trials of new
and innovative tariffs in the forthcoming year. This will enable us to work
with customers to understand their concerns and views on how charges can be
reflected fairly as well as to ensure that we support and incentivise
efficient water usage.
Investing in our communities' future
We are passionate about contributing positively to the communities in the
regions we serve. We continue to support community groups with funding
available in all our regions including South West Water's Neighbourhood Fund
and Water Saving Community Fund, and Bristol Water's Community Fund,
supporting a range of initiatives across the Bristol region.
Our school education programme is focused on teaching school children the
importance of water conservation and environmental protection, illustrating
the part they can play through being careful with what is discarded through
the wastewater network. Through this programme we have directly taught over
12,000 pupils in K7 to date about water conservation and environmental
protection.
As the largest private employer in the South West with over 3,000 employees,
we have an ambition to be both an employer of choice, and to create a great
place to work. Over K7 we will have created an additional 500 jobs in the
community and we anticipate a further 2,000 in K8. We believe in ensuring our
employees are paid fairly and according to the cost of living as one of around
14,000 accredited Living Wage Foundation employers in the UK.
We are also passionate about creating a diverse and inclusive place to thrive,
and are proud to have increased gender diversity across the Group. Our Board
continue to be advocates of the #10000blackinterns initiative and the Change
the Race Ratio, having supported both for over three years now. We are also
one of a few FTSE businesses to have both a female CEO and Chair, and have
more women on the Board than men for the first time in Pennon's history, and
we continue to exceed the 40% target, and we were delighted to have retained
first place in the FTSE250 Women Leaders Survey for Utilities.
We pride ourselves on training excellence, including our in-house state of the
art network training facility which provides hands-on training of a
pressurised network. As part of our continuous focus on the health and safety
of our colleagues, over 23,000 hours of 'HomeSafe' in-person or online
training has been completed this year to date.
Through our membership of 'The 5% Club' we are also investing in the next
generation, embracing an 'earn and learn' culture. We are delighted to be the
only water company to have been awarded Gold membership status for the second
year running with 10% of our employees on development programmes. We launched
our graduate programme in 2021 and our 2023 programme, our most diverse to
date with two thirds female representation and 40% ethnic diversity, was 1700%
over subscribed. We are committed to create 200 opportunities for graduates by
2030. Through our apprenticeship programme we have created over 300
apprenticeships to date in K7, and we remain on track to reach 500
apprenticeships by 2025. In recognition of our efforts, we were the only water
company to be included in The Top 100 Apprenticeship Employers for 2023 which
celebrates England's apprenticeship employers, recognising their commitment to
creating new apprenticeships.
As Tier 1 funders of the Social Mobility Business Partnership we are also
providing work experience programmes for 150 students to date from low income
backgrounds across the South West and we have committed to support 5,000 young
people across our region through work experience by 2030.
We have also been looking at our culture and values, the "golden thread"
across the Group that focuses on not just what we do, but why and how we do
it. Built from the inside out with employee forums, stakeholder interviews,
leadership sessions, and sessions with our trade unions, we also undertook
external and competitor desk research. Three themes emerged around trust,
responsibility and being future-focused. We believe our new values are
powerful - not only will they help us be the very best we can be, as
individuals, teams and as a business, but there's an added dimension with an
external focus in being rock solid in the way we act and build trust.
Delivering improved outcomes for customers
South West Water continues to target improved ODI performance, with
c.75%(( 21 (#_ftn21) )) either on track, or ahead of target across a broad
range of challenging bespoke, common and comparative measures. 9 ODIs continue
to represent areas of excellence having achieved their 2025 target early, with
a further 22 forecast to achieve or outperform their 2023/24 target. Bristol
Water is on track to achieve c.70%(21) of its ODIs, with 3 ODIs representing
areas of excellence and a further 18 forecast to achieve or outperform their
target for 2023/24.
Areas of excellence for South West Water include bathing water quality where a
further four sites have been delivered in addition to our target, biodiversity
enhancement which has improved an additional 6,500 hectares, and internal
sewer flooding which is currently 40% favourable to target.
Bristol Water consistently perform well on customer service, including
properties at risk of low pressure, and C-MeX performance which has improved
over each year of the regulatory period to date, and currently ranks Bristol
Water as upper quartile. This presents an excellent opportunity to share best
practice following the completion of the merger earlier this year.
For South West Water, key areas of focus include wastewater pollutions and the
Environmental Performance Assessment (EPA) which are closely linked. Our
published Pollution Incident Reduction Plan reports against the interventions
we are taking to improve our performance as we target a further 50% reduction
in pollutions to 2024. For Bristol Water, making improvements to address
legacy water quality performance is key, along with increasing the number of
metered customers.
South West Water's delivery on its published improvement plans is demonstrated
in Ofwat's most recently published water company performance report,
classifying South West Water as a relatively good performing company,
demonstrating year on year improvement. We performed well when compared to our
peers as a frontier company for internal sewer flooding and unplanned outage,
as well as ranking in the top quartile for water quality and supply
interruptions (when compared to water and sewerage companies) as well as
meeting our leakage, mains repairs and sewer collapses targets again in
2022/23. For 2022, our treatment works compliance improved to 99.4%, however,
performance over this summer was challenging and we are forecasting to fall
short of our target for 2023, alongside a slight increase in wastewater
pollution incidents. From a customer perspective, whilst we continue to
outperform our priority services targets, C-MeX continues to be a key area of
improvement, and we see opportunity to share best practise with Bristol -
which rank in the top quartile for this measure.
Bristol Water was classified as lagging as a result of the impact on the water
network due to the extreme cold conditions in late 2022, impacting leakage,
mains repairs and supply interruptions. Investment in the Bristol Water region
is focused on improving the consistency of performance and embedding best
practice to provide a sustainable platform across the water business. We are
focused on improving water quality in Bristol, applying our Quality First
approach to improvements as well as investing in sustainable long-term
improvements we have delivered in the Bournemouth and Isles of Scilly regions.
South West Water's ODI performance in K7 to date reflects an industry upper
quartile position, with Bristol Water in line with the industry average,
placing the Group in a robust position as we head into K8, where delivery is
focused predominantly on industry common ODIs.
Continued doubling of base returns enabling reinvestment in additional
initiatives
Driving outperformance gives us the flexibility to deliver more within a
regulatory delivery period - with reinvestment supporting the delivery of
additional initiatives. Our cumulative Group RORE performance for H1 2023/24
continues to be strong at 7.9% representing a doubling of base returns. This
reflects cumulative RORE outperformance for South West Water of 8.1%, and 6.1%
for Bristol Water.
This performance is driven by the Group's agile financing strategy and diverse
debt portfolio, with a comparatively lower level of index-linked debt relative
to the industry average, allowing us to outperform the cost of debt
allowances. Our efficient financing strategy continues to drive significant
outperformance with South West Water's effective interest rate(^) at 5.8% (H1
2022/23 5.8%). Given the current macro-environment, this strong financing
outperformance has outweighed totex and net ODI penalty contributions.
Whilst ODI performance 22 (#_ftn22) (, 23 (#_ftn23) ) across the Group in H1
2023/24 has improved from 2022/23, we anticipate a net financial penalty of
c.£1.7million for South West Water, and a net financial penalty of c.£0.8
million for Bristol Water.
Cumulative RORE outperformance equates to c.£190 24 (#_ftn24) million in K7
to date, reflecting c.£250 25 (#_ftn25) million financing outperformance,
net of c.£20 million ODI penalty, and c.£40 26 (#_ftn26) million totex
underperformance. Total outperformance to date is being utilised to support
reinvestment across the Group to deliver additional environmental initiatives,
including our WaterFit programme, to improve coastal and river water quality,
and water resource diversification investments to boost resilience and break
the cycle of drought. In addition to this, c.£20 million funded the
accelerated delivery of our second WaterShare+ issuance, earlier this year.
Return on Regulated Equity
The table below summarises the cumulative RORE position for both South West
Water and Bristol Water:
Ofwat RORE WaterShare RORE 27 (#_ftn27)
South West Water Bristol Water South West Water Bristol Water
Base return 3.9% 4.5% 3.9% 4.5%
Totex (1.1)% (0.1)% (0.7)% 0.3%
ODI (0.3)% (0.9)% (0.3)% (1.0)%
Tax 0.7% 0.2% N/A N/A
Financing 4.9% 2.4% 3.3% 0.2%
Cumulative RORE 8.1% 6.1% 6.2% 4.0%
Investigations
There are two regulatory investigations outstanding for South West Water:
1) Following the announcement of the industry-wide investigations by Ofwat
and the Environment Agency into all WASCs with regards to environmental
performance of wastewater treatment works in November 2021. We have received a
number of information requests from both regulators and continue to work
openly and transparently in the provision of the information they require.
2) In May 2023 Ofwat announced investigation into South West Water's
leakage and per capita consumption data. The focus of the investigation is the
reduction in leakage experienced in 2021/22, following South West Water
missing its leakage target in the previous year. We have openly and
transparently discussed with Ofwat, and provided them with the information
they have requested in relation to, the judgements made when calculating
leakage and per capita consumption data in this complex area. We have
commissioned work utilising the very latest calculation approaches in line
with best practice, to further aid understanding of year-on-year performance.
At this stage of the investigations we are not sighted on timescales, next
steps or outcomes from either Ofwat or the Environment Agency.
Growing a profitable, sustainable national platform for business retail
Pennon Water Services, with a market share of c.6% continues to deliver on its
growth ambitions, winning c.£2.8 million of new contracts during the period,
and through a simple, transparent and competitive service offering. Pennon
Water Services attracted businesses of all sizes and sectors during the
period, including Verdant Leisure, Borough Care Ltd, Agrial Fresh, and
Esterchem. Pennon Water Services has one of the lowest customer attrition
rates in the market, demonstrated through the retention of strategic water
users such as Princes Foods, Asahi, Partingtons and Country Style Foods,
recognising the value from their relationship with Pennon Water Services and
renewing their retail contracts.
Pennon Water Services' customers continued to recognise the value and support
provided, as reflected through a Trustpilot rating of excellent - 4.8/5 and a
c.23% reduction in complaints in comparison to last year, reflecting efforts
to refine and improve customer service.
Through our acquisition of Bristol Water, the Group acquired a 30% share in
water2business - led by a strong team who are also focused on delivering an
outstanding customer experience, with a Trustpilot score of 4.9/5 and a market
performance score of 97%. With a c.6% market share, water2business offers
tailored water and wastewater management helping customers improve efficiency
and deliver savings.
Strong PR24 platform for delivery
As we look to the next regulatory period, we are confident in our ability to
deliver on our commitments, given the strong platform we have created to date.
We are making excellent progress in delivering against our key priorities -
investing to deliver environmental improvements and innovating to deliver
sustainable increases in water resource availability, whilst ensuring we keep
bills as low as possible.
Our focus on efficient delivery to date means that bills are currently at
their lowest point for ten years, at a time when many customers are struggling
with the cost of living. This also means that we have been able to keep bill
increases into K8 as low as possible.
South West Water's top quartile ODI performance creates a strong base from
which to deliver further ODI improvements across both South West Water and
Bristol Water, now the merger is complete, and we are confident in achieving
our 2025 ODI targets in line with our published action and investment plans in
place.
We are well positioned in our capital delivery capability across the South
West. We have appointed six Tier 1 delivery partners with long-term contracts
that can run out to ten years. Main construction partners appointed in the
west of our region include BAM Nuttall, Clancy and Mott McDonald Bentley, and
in the east, Tilbury Douglas, MWH Treatment and Network Plus Envolve.
Our socially responsible business model, WaterShare+, turns the monopoly water
provider model on its head by giving customers a stake and a say in their
local water company is growing and with around 90,000 customer shareholders,
differentiates us from the rest of the sector.
Underpinning all of this is our balance sheet strength - demonstrated by our
responsible gearing, which is well within our established gearing range of
55-65%.
Ambitious plan for PR24 - the 'Right Deal' for our regions
Our plan for 2025-2030 is a plan that continues to do what we said we would.
It's a plan that goes further in tackling the biggest challenges in our
region, as we invest to protect water quality and enhance resilience, tackle
storm overflows at our beaches, eradicate pollutions and protect the
environment from climate change. With a laser like focus on efficiency, it's
also a plan that supports customer affordability - balancing an extensive
investment plan, whilst keeping bill increases to 3-4%, per annum, across each
of our regions. Our £2.8 billion investment plan is our most ambitious yet
and we believe is the right plan, and the right deal for our region.
With a third of the nation's bathing beaches, 860 miles of coastline and a
largely granite peninsula with adjacency to the western approaches of the
Atlantic Ocean, climate change is already changing how we live. Drought,
flooding, rising sea levels and coastal erosion are too frequently part of
everyday lives. Last year, the South West experienced one of the hottest,
driest summers since records began. Rising sea levels and coastal erosion
presents one of the greatest risks to our region. Not only are some of our
biggest cities, Exeter and Plymouth, vulnerable, but so too are the homes and
livelihoods of thousands of people right across the South West. The majority
of our population is concentrated around the coastline, and so are the
majority of our assets.
Our £2.8 billion investment will further build on the progress made in K7 in
tackling the biggest challenges head on. It is a plan grounded in extensive
customer research, having engaged more than 30,000 customers and over 1,000
local stakeholders in its development. Our customers have shaped this plan,
including key aspects including the investment priorities, below, and the
profiling of customer bills. Overall, our plan has received strong support
that we should invest more, with universal agreement that the priorities are
the right ones.
Storm overflows and pollutions
· By 2030, we will have tackled all storm overflows at our bathing
beaches, shellfish waters and high spilling sites - 20 years ahead of the
government mandated target, given the importance of tourism to our region
· To restore confidence in our bathing waters, we will implement a
first of its kind monitoring regime so everyone can enjoy being in the water
at their favourite beach
· We will take a "Green First" approach to investment, working with
nature to improve drainage and reduce storm overflows usage
· We will deliver a reduction in pollution levels to industry leading
lows, with zero serious pollutions.
Water resilience and water quality
· Upgrading a third of water treatment works across our region and
investing in two new treatment works in Bristol, alongside Bournemouth's
completion of state-of-the-art ceramic new treatment works
· Resurrecting plans for the Cheddar 2 reservoir to boost water
resources in the Greater South West
· Creating a water grid to ensure all our strategic reservoirs are
connected, ensuring we can move resources across the region
· Reducing leakage levels to less than 10% on our network and less than
4% on customers' networks.
Net zero and environmental gains
· Continue with our 'Promise to the Planet' to become Net Zero by 2030
by decarbonising our operations, and reducing emissions of Nitrous Oxide and
repurposing methane
· Expanding our nature recovery programme - extending Upstream Thinking
into new catchments, planting 300,000 trees and re-naturalising waterways for
wildlife
· Transforming sludge treatment processes to protect rivers.
Addressing affordability and delivering for customers
· Extending our commitment to ensure zero customers in water poverty to
2030
· Delivering our largest ever package of support with over £200
million of affordability measures
· Expanding our unique WaterShare+ scheme to one in every 10 households
· Introducing a range of fair tariffs to help customers to use less and
save more.
With a laser like focus on delivering efficiency our £4.5 billion totex plan
reflects a 12% efficiency assumption. It is also a plan that supports customer
affordability, with 3-4% bill increases across our regions, per annum. Our
plan will also support the creation c.2,000 jobs in the region as we commit to
providing 1,000 apprentice and graduate opportunities to 2030, and provide
further security in the wider supply chain across the region.
Critically, it is also a financeable plan, benefiting from a strong balance
sheet providing financial resilience. Our current gearing at 61.0%, is at a
relatively low level compared to the sector, and as we move into the next
regulatory period our gearing will average 63.3% over K7, which remains within
our well-established 55-65% range. Our gearing will also benefit from
regulatory true-up adjustments taking our K8 opening RCV to c.£5.4 billion,
which includes c.£0.2 billion resulting from additional totex planned in the
current regulatory period(( 28 (#_ftn28) )).
Over K8, we anticipate total RCV to increase to £7.4 billion by 2030,
reflecting nominal RCV growth of 38% (real - 25%), through our long-term
investments and the value being created for customers, the environment and our
investors.
We are confident and well positioned in our capital delivery capability across
the South West. We have appointed six Tier 1 delivery partners with long term
contracts that can run out to 10 years. Advance planning for the transition to
the plan's delivery model has been underway since September 2022, broadening
our supply chain alliance, and Tier 2 & 3 partners will be ready for the
start of the next financial year.
In summary, our 2025-2030 business plan is a plan building on the momentum we
have today, that goes further in tackling the biggest challenges in our
region, as we invest to protect water quality and resilience, tackle storm
overflows at our beaches, eradicate pollutions and protect the environment
from climate change.
The submission of our K8 business plan is just the first step, and over the
coming months Ofwat will review and assess our plan in detail. As always, we
will work collaboratively with Ofwat throughout this process to provide any
further insight into our most ambitious plan to date. In line with Ofwat's
current timetable we anticipate Draft Determinations in May / June 2024, and
Final Determinations in December 2024.
Outlook - technical Guidance - full year 2023/24
Pennon Group FY 2022/23 Change
Revenue* • Inflation reflected in 2023/24 tariffs in South West Water £825.0m ▲
partially offset by in-year impact of regulatory adjustments and ODI penalties
• Ongoing growth in our retail businesses, including growth
external to our wholesale region
Net debt • Continued delivery of accelerated environmental capital £2,965.4m ▲
investment across the Group
• Accretion on index-linked debt
Current tax • 2022/23 current tax effective credit rate reflects prior year 16.1% ▲
credit as a result of additional super-deductions and lower non-deductible
expenditure following the submission of the 2022 corporate tax computations (credit rate)
• Higher capital allowances from the Group's continued capital
investment programme together with full expensing means that the Group
anticipates generating tax losses in the remaining years of K7 resulting in
effective tax rate around 0%
Operating costs* • Growth in retail businesses leading to higher wholesale supply £517.2m ▲
charges external to our regions increasing total Group operating costs
• Ongoing inflationary increases on input costs
• Power costs expected to be flat year on year 29 (#_ftn29) . We
anticipate consumption to remain elevated while we recover from the drought
conditions.
• Pay increases between c.5-7% for 2023/24
• Continued delivery of efficiencies
Depreciation* • Expanded capital programme driving increases in depreciation £154.7m ▲
Net interest* • RPI swaps over K7 to smooth the impact of inflation £136.6m ▲
• Increased variable rates on floating rate debt - c.65% of debt
fixed
• Increased levels of debt to support capital investment profile
Capex • Capital expenditure reflects K7 existing profile of investment £358.3m ▲
along with additional and accelerated environmental investment
RORE • Expected year on year reduction in line with lower inflation 10.5% ▼
expectations - continued expectation of a doubling of cumulative base returns
(Underlying Ofwat measure) for the Group
RCV 30 (#_ftn30) • Increase in line with K7 business plan levels of investment in £4.7bn ▲
addition to additional and accelerated investment, regulatory true-ups and
inflationary impact - shadow RCV for March 2024 forecast £5.1bn
*All measures on an underlying basis
PRINCIPAL RISKS AND UNCERTAINTIES
Principal Risks
During the year the Board has reviewed the current and emerging principal
risks in the context of the Group's strategic objectives and priorities, the
Group's risk appetite and the external environment within which it operates.
This includes the impact of changes to the external macro-economic, legal and
regulatory environment within which the Group operates. The Group's principal
risks are:
Law, Regulation and Finance
1. Changes in Government policy
2. Regulatory frameworks
3. Non-compliance with laws and regulations
4. Inability to secure sufficient finance and funding, within our debt
covenants, to meet ongoing commitments
5. Non-compliance or occurrence of avoidable health and safety incidents
6. Failure to pay all pension obligations as they fall due and increased
costs to the Group should the defined benefit pension scheme deficit increase
Market and Economic Conditions
7. Macro-economic near-term risks impacting on inflation, interest rates
and power prices
Operating Performance
8. Failure to deliver the Group's 2030 Net Zero Commitment to respond to
the impact of climate change
9. Availability of sufficient water resources to meet current and future
demand
10. Failure of operational water treatment assets and processes resulting in
an inability to produce or supply clean drinking water
11. Failure of operational wastewater assets and processes resulting in an
inability to remove and treat wastewater and potential environmental impacts,
including pollutions
12. Non-delivery of customer and environmental commitments
13. Insufficient skills and resources to meet the current and future business
needs and deliver the Group's strategic priorities
Business Systems and Capital Investment
14. Insufficient capacity and resilience of the supply chain to deliver the
Group's operational and capital programmes
15. Cyber attack or inadequate technological security results in a breach of
the Group's assets, systems and data
CAUTIONARY STATEMENT IN RESPECT OF FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements relating to the Pennon Group's
operations, performance and financial position based on current expectations
of, and assumptions and forecasts made by, Pennon Group management which may
constitute "forward-looking statements" within the meaning of the U.S. Private
Securities Litigation Reform Act of 1995. Forward-looking statements are
identified in this Report by words such as "anticipate", "aim", "believe",
"continue", "could", "due", "estimate", "expect", "forecast", "goal",
"intend", "may", "outlook", "plan", "probably", "project", "remain", "seek",
"should", "target", "will", "would" and related and similar expressions, as
well as statements in the future tense. All statements other than of
historical fact may be forward-looking statements and represent the Group's
belief regarding future events, many of which, by their nature, are inherently
uncertain and outside the Group's control. Various known and unknown risks,
uncertainties and other factors could lead to substantial differences between
the actual future results, financial situation, development or performance of
the Group and the estimates and historical results given herein. Important
risks, uncertainties and other factors that could cause actual results,
performance or achievements of Pennon Group to differ materially from any
outcomes or results expressed or implied by such forward-looking statements
include, among other things, changes in Government policy; regulatory and
legal reform; compliance with laws and regulations; maintaining sufficient
finance and funding to meet ongoing commitments; non-compliance or occurrence
of avoidable health and safety incidents; tax compliance and contribution;
failure to pay all pension obligations as they fall due and increased costs to
the Group should the defined benefit pension scheme deficit increase;
non-recovery of customer debt; poor operating performance due to extreme
weather or climate change; macro-economic risks impacting commodity and power
prices and other matters; poor customer service and/or increased competition
leading to loss of customer base; business interruption or significant
operational failure/incidents; difficulty in recruitment, retention and
development of skills; non-delivery of regulatory outcomes and performance
commitments; failure or increased cost of capital projects/exposure to
contract failures; failure of information technology systems, management and
protection, including cyber risks; and all other risks in the Pennon Group
Annual Report published in June 2023. Such forward looking statements should
therefore be construed in light of all risks, uncertainties, and other
factors, including without limitation those identified above, and undue
reliance should not be placed on them. Nothing in this report should be
construed as a profit forecast.
Any forward-looking statements are made only as of the date of this document
and no representation, assurance, guarantee or warranty is given in relation
to them including as to their accuracy, completeness, or the basis on which
they are made. The Group accepts no obligation to revise or update publicly
these forward-looking statements or adjust them as a result of new information
or for future events or developments, except to the extent legally required.
UNSOLICITED COMMUNICATIONS WITH SHAREHOLDERS
A number of companies, including Pennon Group plc, continue to be aware that
their shareholders have received unsolicited telephone calls or correspondence
concerning investment matters which imply a connection to the company
concerned. If shareholders have any concerns about any contact they have
received, then please refer to the Financial Conduct Authority's website
www.fca.org.uk/scamsmart. Details of any share dealing facilities that the
Company endorses will be included in Company mailings.
PENNON GROUP PLC
Consolidated income statement for the half year ended 30 September 2023
Unaudited
Before non-underlying items Non-underlying items (note 5) half year ended 30 September 2023 Total Before non-underlying items Non-underlying items (note 5) half year ended 30 September 2022 Total
half year
half year
half year
half year ended 30 September 2022
ended 30 September 2023
ended 30 September 2023
ended 30 September 2022
Notes £m £m £m £m £m £m
Revenue 4 448.6 - 448.6 425.5 - 425.5
Operating costs
Employment costs (61.3) - (61.3) (50.7) - (50.7)
Raw materials and consumables used (18.6) - (18.6) (15.9) - (15.9)
Other operating expenses (196.4) (5.9) (202.3) (180.0) (1.6) (181.6)
Trade receivables impairment (3.8) - (3.8) (4.3) - (4.3)
Earnings before interest, tax, 4 168.5 (5.9) 162.6 174.6 (1.6) 173.0
depreciation and amortisation
Depreciation and amortisation (82.6) - (82.6) (77.4) - (77.4)
Operating Profit 4 85.9 (5.9) 80.0 97.2 (1.6) 95.6
Finance income 6 5.7 - 5.7 3.4 - 3.4
Finance costs 6 (83.0) - (83.0) (78.1) - (78.1)
Net finance costs 6 (77.3) - (77.3) (74.7) - (74.7)
Share of post-tax profit from associated companies 0.5 - 0.5 - - -
Profit before tax 4 9.1 (5.9) 3.2 22.5 (1.6) 20.9
Taxation 7 (2.8) 1.4 (1.4) (2.7) 0.3 (2.4)
Profit for the period 6.3 (4.5) 1.8 19.8 (1.3) 18.5
Attributable to:
Ordinary shareholders of the parent 5.9 (4.5) 1.4 19.6 (1.3) 18.3
Non-controlling interests 0.4 - 0.4 0.2 - 0.2
Earnings per ordinary share 8
(pence per share)
- Basic 0.5 7.0
- Diluted 0.5 6.9
The Group activities above are derived from continuing activities.
The notes on pages 48 to 64 form part of this condensed half year financial
information.
PENNON GROUP PLC
Consolidated statement of comprehensive income for the half year ended 30
September 2023
Unaudited
Before non-underlying items Non-underlying items (note 5) half year ended 30 September 2023 Total Before non-underlying items Non-underlying items (note 5) half year ended 30 September 2022 Total
half year
half year
half year
half year ended 30 September 2022
ended 30 September 2023
ended 30 September 2023
ended 30 September 2022
£m £m £m £m £m £m
Profit for the period 6.3 (4.5) 1.8 19.8 (1.3) 18.5
Other comprehensive income
Items that will not be reclassified to profit or loss
Remeasurement of defined benefit (28.6) - (28.6) (15.6) - (15.6)
obligations (note 16)
Income tax on items that will not be reclassified 7.1 - 7.1 3.6 - 3.6
Total items that will not be (21.5) - (21.5) (12.0) - (12.0)
reclassified to profit or loss
Items that may be reclassified subsequently
to profit or loss
Cash flow hedges 19.1 - 19.1 64.6 - 64.6
Income tax on items that may be reclassified (4.7) - (4.7) (16.1) - (16.1)
Total items that may be reclassified 14.4 - 14.4 48.5 - 48.5
subsequently to profit or loss
Other comprehensive (loss) / income for the period (7.1) - (7.1) 36.5 - 36.5
net of tax
Total comprehensive (loss) / income for the period (0.8) (4.5) (5.3) 56.3 (1.3) 55.0
Total comprehensive (loss) / income attributable to:
Ordinary shareholders of the parent (1.2) (4.5) (5.7) 56.1 (1.3) 54.8
Non-controlling interests 0.4 - 0.4 0.2 - 0.2
The notes on pages 48 to 64 form part of this condensed half year financial
information.
PENNON GROUP PLC
Consolidated balance sheet at 30 September 2023
Unaudited Audited
30 September 2023 31 March
2023
Notes £m £m
ASSETS
Non-current assets
Goodwill 163.9 163.9
Other intangible assets 17 40.4 14.9
Property, plant and equipment 17 4,640.3 4,476.9
Other non-current assets 14.8 23.2
Financial assets at fair value through profit 1.2 1.3
Derivative financial instruments 42.2 33.2
Investments in associated companies 0.8 0.3
Retirement benefit assets 16 0.3 29.3
4,903.9 4,743.0
Current assets
Inventories 9.9 10.0
Trade and other receivables 290.4 238.0
Current tax receivable 9.0 8.4
Financial assets at fair value through profit and loss 1.0 -
Derivative financial instruments 29.4 20.7
Cash and cash deposits 14 94.4 165.4
434.1 442.5
LIABILITIES
Current liabilities
Borrowings 14 (129.1) (124.7)
Financial liabilities at fair value through profit and loss - (2.6)
Derivative financial instruments (1.5) (2.4)
Trade and other payables 18 (210.9) (225.4)
Provisions - (0.4)
(341.5) (355.5)
Net current assets 92.6 87.0
Non-current liabilities
Borrowings 14 (3,292.1) (3,006.1)
Other non-current liabilities 18 (152.7) (155.3)
Financial liabilities at fair value through profit and loss (36.4) (34.0)
Derivative financial instruments (1.5) (2.4)
Deferred tax liabilities (506.7) (507.0)
(3,989.4) (3,704.8)
Net assets 1,007.1 1,125.2
Shareholder's equity
Share capital 10 159.5 159.5
Share premium account 11 237.7 237.6
Capital redemption reserve 12 157.1 157.1
Retained earnings and other reserves 452.0 570.6
Total shareholders' equity 1,006.3 1,124.8
Non-controlling interests 0.8 0.4
Total equity 1,007.1 1,125.2
The notes on pages 48 to 64 form part of this condensed half year financial
information.
PENNON GROUP PLC
Consolidated statement of changes in equity for the half year ended 30
September 2023
Unaudited
Share capital Share premium account (note 11) Capital redemption reserve Retained earnings and other reserves Non-controlling interests Total equity
(note 10)
(note 12)
£m £m £m £m £m £m
At 1 April 2022 161.7 235.5 154.7 722.6 0.1 1,274.6
Profit for the period - - - 18.4 0.2 18.6
Other comprehensive income for the period - - - 36.5 - 36.5
Total comprehensive income for the period - - - 54.9 0.2 55.1
Transactions with equity shareholders:
Dividends paid - - - (101.5) - (101.5)
Shares purchased for cancellation - - - (40.0) - (40.0)
Shares cancelled (note 10) (2.4) - 2.4 - - -
Adjustments in respect of share-based - - - 0.8 - 0.8
payments (net of tax)
Own shares acquired by the Pennon Employee - - - (4.7) - (4.7)
Share Trust in respect of Share options
Proceeds from shares issued under 0.2 1.5 - - - 1.7
the Sharesave Scheme
Total transactions with equity shareholders (2.2) 1.5 2.4 (145.4) - (143.7)
At 30 September 2022 159.5 237.0 157.1 632.1 0.3 1,186.0
Unaudited
Share Share premium account (note 11) Capital redemption reserve Retained earnings and other reserves Non-controlling interests Total equity
capital
(note 10) (note 12)
£m £m £m £m £m £m
At 1 April 2023 159.5 237.6 157.1 570.6 0.4 1,125.2
Profit for the period - - - 1.4 0.4 1.8
Other comprehensive income for the period - - - (7.1) - (7.1)
Total comprehensive income for the period - - - (5.7) 0.4 (5.3)
Transactions with equity shareholders:
Dividends paid - - - (111.7) - (111.7)
Adjustments in respect of share-based - - - 0.2 - 0.2
payments (net of tax)
Own shares acquired by the Pennon Employee - - - (1.4) - (1.4)
Share Trust in respect of Share options
Proceeds from shares issued under - 0.1 - - - 0.1
the Sharesave Scheme
Total transactions with equity shareholders - 0.1 - (112.9) - (112.8)
At 30 September 2023 159.5 237.7 157.1 452.0 0.8 1,007.1
The notes on pages 48 to 64 form part of this condensed half year financial
information.
PENNON GROUP PLC
Consolidated statement of cash flows for the half year ended 30 September 2023
Unaudited
Half year ended 30 September 2023 Half year
ended 30 September
2022
(restated*)
Notes £m £m
Cash flows from operating activities
Cash generated from operations 13 88.8 160.2
Interest paid (49.3) (96.7)
Tax paid - (3.1)
Net cash generated from operating activities 39.5 60.4
Cash flows from investing activities
Interest received 3.8 3.4
Purchase of property, plant and equipment (249.8) (153.0)
Purchase of intangible assets (20.7) (2.4)
Proceeds from sale of property, plant and equipment 0.2 -
Advance of short-term loan 14 - (25.0)
Movement of restricted deposits - 140.3
Net cash used in investing activities (266.5) (36.7)
Cash flows from financing activities
Proceeds from issuance of ordinary shares 0.1 1.7
Purchase of ordinary shares by the Pennon Employee Share Trust (1.4) (4.7)
Proceeds from new borrowings 325.1 108.0
Repayment of borrowings (70.2) (57.2)
Cash inflows from lease financing arrangements 13 24.8 5.0
Lease principal repayments (including net recoverable VAT) (10.7) (96.5)
Dividends paid 9 (111.7) (101.5)
Repurchase of own shares - (40.0)
Net cash used in financing activities 156.0 (185.2)
Net decrease in cash and cash deposits (71.0) (161.5)
Cash and cash deposits at beginning of period 14 143.7 351.2
Cash and cash deposits at end of period 14 72.7 189.7
*See note 2
The notes on pages 48 to 64 form part of this condensed half year financial
information.
PENNON GROUP PLC
Notes to condensed half year financial information
1. General information
Pennon Group plc is a company registered in the United Kingdom under the
Companies Act 2006. The address of the registered office is given on page
64. Pennon Group's business is operated through two principal subsidiaries.
South West Water Limited, providing water and wastewater services in Devon,
Cornwall and parts of Dorset and Somerset and water only services in parts of
Dorset, Hampshire, Wiltshire and Bristol. Following the statutory licence
transfer from Bristol Water plc to South West Water Limited on 1 February 2023
the regulated water business of Bristol Water plc transferred to South West
Water Limited. Pennon Group is the majority shareholder of Pennon Water
Services Limited, a company providing water and wastewater retail services to
non-household customer accounts across Great Britain. Bristol Water Holdings
Limited owns a 30% share in Water 2 Business Limited, a joint venture with
Wessex Water, operating in the same sector as Pennon Water Services Limited.
In the first half of 2023/24, South West Water Limited completed its first
syndicated private placement transaction, with the company receiving £300
million with an average maturity of 12 years and a fixed rate of interest, to
support the ongoing K7 business plan projects.
This condensed half year financial information was approved by the Board of
Directors on 28 November 2023.
The financial information for the period ended 30 September 2023 does not
constitute statutory accounts within the meaning of section 435 of the
Companies Act 2006. The statutory accounts for 31 March 2023 were approved
by the Board of Directors on 31 May 2023 and have been delivered to the
Registrar of Companies. The independent auditor's report on these financial
statements was unqualified and did not contain a statement under section 498
of the Companies Act 2006.
2. Basis of preparation
This condensed half year financial information has been prepared in accordance
with the Disclosure and Transparency Rules of the Financial Services
Authority, and UK adopted IAS 34 'Interim financial reporting'. This condensed
half year financial information should be read in conjunction with the Pennon
Group plc Annual Report and Accounts for the year ended 31 March 2023, which
were prepared in accordance with UK-adopted international accounting standards
and in conformity with the requirements of the Companies Act 2006.
The going concern basis has been adopted in preparing the condensed half year
financial information (interim accounts). At 30 September 2023 the Group has
access to undrawn committed funds and cash and cash deposits totalling £544
million, including cash and other short-term deposits of £94 million and
£450 million of undrawn facilities. Cash and other short-term deposits
include £22 million of restricted funds deposited with lessors which are
available for access, subject to being replaced by an equivalent valued
security.
In making their assessment, the Directors reviewed the principal risks and
considered which risks might threaten the Group's going concern status, to do
this the Group's business plan has been stress-tested. Whilst the Group's risk
management processes seek to mitigate the impact of principal risks,
individual sensitivities against these risks have been identified. These
sensitivities, which are ascribed a value with reference to risk weighting,
factoring in the likelihood of occurrence and financial impact, were applied
to the baseline financial forecast which uses the Group's annual budget for FY
2023/24 and longer-term strategic business plan for the remainder of the going
concern period to 30 November 2024. Over the past year we also agreed updated
covenant terms on the vast majority of our facilities and the Directors are
confident that the full covenant update process will be successfully
completed. For facilities where changes to covenant terms are not finalised at
the date of approval of the financial statements, we have modelled the impact
on the Group's solvency, using existing terms, under a stress-tested scenario,
and concluded this does not compromise the going concern of the Group over the
assessment period. The risks and sensitivities include consideration of;
legislative impacts such as change in government policy and non-compliance
with laws and regulations, macro-economic impacts such as inflation and
interest rate increases, and operational impacts such as ensuring adequate
water resources and failure of operational assets. A combined stress testing
scenario has been performed to assess the overall impact of these individual
scenarios impacting the Group collectively. The combined weighted impact of
the risks occurring is c.£87m, this value is considered equivalent to an
extreme one-off event that could occur within a year, the probability of such
an event happening is deemed unlikely.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
2. Basis of preparation (continued)
Through this testing, it has been determined that none of the individual
principal risks would in isolation, or in aggregate, compromise the going
concern of the Group over the going concern period, the assessment has been
considered by reviewing the impact on the solvency position as well as debt
and interest covenants. In the combined scenario to ensure that the Group was
able to continue as a going concern, additional mitigations could be deployed
to reduce gearing and increase covenant headroom. Examples of mitigations
could include; controllable measures such as a reduction in discretionary
operational expenditure, deferral of capital expenditure and / or cancellation
of non-essential capital expenditure, reduction in the amount of dividend
payable, and other measures such as raising additional funding.
In addition, we have modelled a reverse engineered scenario that could
possibly compromise the Group's solvency over the going concern assessment
period. This scenario builds on the factors above and additionally assumes all
the Group's principal risks are incurred within the going concern period, with
no probability weightings attached. The Board considered the likelihood of
this scenario on the Group's solvency over the going concern period, as
remote, given this would require all of the principal risks to be incurred at
maximum impact within the same time frame, without implementing controllable
mitigations, as noted above, or raising additional funding.
Having considered the Group's funding position, status of updates to covenant
terms, and financial projections, which take into account a range of possible
impacts, as described in this report, the Directors have a reasonable
expectation that that the Group will meet the requirements of its covenants
and has adequate resources to continue in operational existence for the period
to the end of the going concern assessment period of 30 November 2024, and
that there are no material uncertainties to disclose. For this reason, they
continue to adopt the going concern basis in preparing the interim accounts.
This condensed half year financial information has been reviewed, but not
audited, by the independent auditor pursuant to the Auditing Practices Board
guidance on the 'Review of Interim Financial Information'.
The preparation of the half year financial information requires management to
make judgements, estimates and assumptions that affect the application of
accounting policies and the reported amounts of assets and liabilities, income
and expense. Actual results may differ from these estimates. The significant
judgements made by management in applying the Group's accounting policies and
the key sources of estimation uncertainty are consistent with those that
applied to the consolidated financial statements for the year ended 31 March
2023.
Prior period restatement
Following a review of the Consolidated statement of cash flow, the Group has
identified that £51.5 million of interest accreted on certain leases was
incorrectly included within "Lease principal repayments (including net
recoverable VAT)" in the cash flows from financing activities, instead of the
"Interest paid" in Cash flows from operating activities. As such the prior
period consolidated statement of cash flow in respect of the "Lease principal
repayments (including net recoverable VAT)" has been restated from £148.0
million to £96.5 million within the cash flows from financing activities, and
the "Interest paid" in the cash flows from operating activities has been
restated from £45.2 million to £96.7 million. The revised classification, as
a result of this restatement, is consistent with how these amounts were
classified at year end in the 2023 Annual Report and Accounts. There is no
other impact on consolidated income statement, statement of comprehensive
income, balance sheet or statement of changes in equity.
3. Accounting policies
The accounting policies adopted in this condensed half year financial
information are consistent with those applied and set out in the Pennon Group
plc Annual Report and Accounts for the year ended 31 March 2023 and are in
accordance with IFRS and interpretations of the IFRS Interpretations Committee
expected to be applicable for the year ending 31 March 2024 in issue which
have been adopted by the UK.
New standards or interpretations which were mandatory for the first time in
the year beginning 1 April 2023 did not have a material impact on the net
assets or results of the Group. New standards or interpretations due to be
adopted from 1 April 2024 are not expected to have a material impact on the
Group's net assets or results.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
4. Segmental information
Operating segments are reported in a manner consistent with internal reporting
provided to the Chief Operating Decision-Maker (CODM), which has been
identified as the Pennon Group plc Board ('the Board'). The earnings measures
below are used by the Board in making decisions.
The Group is organised into two operating segments. The water segment
comprises the regulated water and wastewater services undertaken by South West
Water. The Non-household retail business reflects the services provided by
Pennon Water Services.
Unaudited
Half year ended 30 September 2023 Half year ended 30 September 2022
Revenue £m £m
Water total 377.8 363.8
Non-household retail 117.6 108.2
Other 1.2 1.1
Less intra-segment trading (48.0) (47.6)
Total revenue 448.6 425.5
Segment result
Operating profit before depreciation, amortisation and
non-underlying items (Underlying EBITDA)
Water total 167.1 172.6
Non-household retail 3.1 2.3
Other (1.7) (0.3)
168.5 174.6
Operating profit before non-underlying items
Water total 87.5 97.8
Non-household retail 2.8 1.9
Other (4.4) (2.5)
85.9 97.2
Profit before tax before non-underlying items
Water total 6.6 19.2
Non-household retail 1.7 1.1
Other 0.8 2.2
9.1 22.5
Profit before tax
Water total 1.2 19.2
Non-household retail 1.7 1.1
Other 0.3 0.6
3.2 20.9
Intra-segment trading between different segments is under normal market based
commercial terms and conditions. Intra-segment revenue of the other segment is
reflected as a cost.
Factors such as seasonal weather patterns can affect sales volumes, income and
costs in the water segments.
All revenue is generated in the United Kingdom. The grouping of revenue
streams by how they are affected by economic factors, as required by IFRS 15,
is as follows:
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
4. Segmental information (continued)
Unaudited
Six months ended 30 September 2022 UK total
Water Non-household Other Total
retail
£m £m £m £m
Segment revenue 363.8 108.2 1.1 473.1
Inter-segment revenue (46.7) - (0.9) (47.6)
Revenue from external customers 317.1 108.2 0.2 425.5
Significant service lines
Water 317.1 - - 317.1
Non-household retail - 108.2 - 108.2
Other - - 0.2 0.2
317.1 108.2 0.2 425.5
Unaudited
Six months ended 30 September 2023 UK total
Water Non-household Other Total
retail
£m £m £m £m
Segment revenue 377.8 117.6 1.2 496.6
Inter-segment revenue (46.7) (0.1) (1.2) (48.0)
Revenue from external customers 331.1 117.5 - 448.6
Significant service lines
Water 331.1 - - 331.1
Non-household retail - 117.5 - 117.5
Other - - - -
331.1 117.5 - 448.6
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
5. Non-underlying items
Non-underlying items are those that in the Directors' view are required to be
separately disclosed by virtue of their size, nature or incidence to enable a
full understanding of the Group's financial performance in the period and
business trends over time. The presentation of results is consistent with
internal performance monitoring.
Unaudited
Half year ended 30 September 2023 Half year ended 30 September 2022
£m £m
Operating Costs
Restructuring / transformation((1)) (3.6) -
Drought((2)) (1.8) -
Renewables acquisition((3)) (0.5) -
Bristol Water integration((4)) - (1.6)
Earnings before interest, tax, depreciation and amortisation (5.9) (1.6)
Non-underlying tax credit 1.4 0.3
Net non-underlying charges (4.5) (1.3)
(1) £3.6 million of costs in connection with the business transformation of South
West Water following the merger of Bristol Water into South West Water.
Further costs of c. £10 million are expected to be incurred in the second
half of this financial year.
(2) In financial year 2022/23, a combination of elevated demand from increased
tourism and record-breaking extremes of prolonged dry and hot weather led to
extremely low water storage levels in the Cornwall region. Drought permits
were issued allowing increased extractions and water-saving measures for the
South West Water region were issued for the first time since 1995. To ensure
the region could be supplied with water over the summer and continuing into
2023, South West Water has instigated a series of mitigating measures and
one-off expenditure to address the situation. c.£17 million of customer
incentives and costs to address the severe drought conditions were recognised
in the second half of 2022/23. In H1 2023/24, a further £1.8 million of
specifically identifiable costs have been incurred to address these specific
issues.
(3) £0.5 million of expenses in connection with the acquisition of four renewable
power generation investments.
(4) The Group incurred expenses of £1.6 million in the half year ended 30
September 2022 in relation to the costs of integration of Bristol Water.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
6. Net finance costs
Unaudited
Half year ended Half year ended
30 September 2023
30 September 2022
Finance costs Finance income Total Finance Finance income Total
costs
£m £m £m £m £m £m
Cost of servicing debt
Bank borrowings and overdrafts (58.0) - (58.0) (60.1) - (60.1)
Interest element of lease payments (22.9) - (22.9) (16.3) - (16.3)
Other finance costs (2.1) - (2.1) (1.7) - (1.7)
Interest receivable - 5.0 5.0 - 2.4 2.4
(83.0) 5.0 (78.0) (78.1) 2.4 (75.7)
Notional interest
Retirement benefit obligations - 0.7 0.7 - 1.0 1.0
Net finance costs (83.0) 5.7 (77.3) (78.1) 3.4 (74.7)
In addition to the above, finance costs of £4.1 million have been capitalised
on qualifying assets included in property, plant and equipment (H1 2022/23
£1.6 million).
7. Taxation
Unaudited
Before non-underlying items Non-underlying items (note 5) half year ended 30 September 2023 Total Before non-underlying items half year ended 30 September 2022 Non-underlying items (note 5) half year ended 30 September 2022 Total
half year
half year
half year ended 30 September 2022
ended 30 September 2023
ended 30 September 2023
£m £m £m £m £m £m
Analysis of charge
Current tax charge / (credit) (0.6) - (0.6) 1.5 (0.3) 1.2
Deferred tax charge / (credit) 3.4 (1.4) 2.0 1.2 - 1.2
Tax charge for the period 2.8 (1.4) 1.4 2.7 (0.3) 2.4
UK corporation tax is calculated at 25% (H1 2022/23 19%) of the estimated
assessable profit for the year. The tax charge for September 2023 and
September 2022 has been derived by applying the anticipated effective annual
tax rate to the first half year profit before tax.
Tax on amounts included in the consolidated statement of comprehensive income,
or directly in equity, is included in those statements respectively.
The effective tax rate for the period for the group, including prior year
adjustments but before the impact of non-underlying items was an effective
charge of 30.8% (H1 2022/23 charge of 12%).
The effective tax rate for the period for the group including prior year
adjustments and the impact of non-underlying items was a charge of 43.8% (H1
2022/23 charge of 11%).
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
8. Earnings per share
Basic earnings per share are calculated by dividing the earnings attributable
to ordinary shareholders by the weighted average number of ordinary shares
outstanding during the period, excluding those held in the employee share
trust which are treated as cancelled. For diluted earnings per share, the
weighted average number of ordinary shares in issue is adjusted to include all
dilutive potential ordinary shares.
The weighted average number of shares and earnings used in the calculations
were:
Unaudited
Half year ended 30 September 2023 Half year ended 30 September 2022
Number of shares (millions)
For basic earnings per share 261.2 262.6
Effect of dilutive potential ordinary shares from share options 0.7 1.1
For diluted earnings per share 261.9 263.7
Adjusted basic and diluted earnings per ordinary share
Adjusted earnings per share are presented to provide a more useful comparison
on business trends and performance. Non-underlying items are adjusted for by
virtue of their size, nature or incidence to enable a full understanding of
the Group's financial performance (as described in note 5). Earnings per share
have been calculated as follows:
Unaudited
Half year ended Half year ended
30 September 2023
30 September 2022
Profit Earnings per share Profit Earnings per share
after tax Basic Diluted after tax Basic Diluted
£m p p £m p p
Statutory earnings 1.4 0.5 0.5 18.3 7.0 6.9
Deferred tax before non-underlying items 3.4 1.4 1.4 1.2 0.4 0.4
Non-underlying items (net of tax) 4.5 1.7 1.7 1.3 0.5 0.5
Adjusted earnings before non-underlying items 9.3 3.6 3.6 20.8 7.9 7.8
and deferred tax
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
9. Dividends
Amounts recognised as distributions to ordinary equity holders in the period: Unaudited
Half year ended 30 September 2023 Half year ended 30 September 2022
£m £m
Interim dividend paid for the year ended 33.9 31.5
31 March 2023: 12.96 pence (2022: 11.70 pence) per share
Final dividend paid for the year ended 77.8 70.0
31 March 2023: 29.77 pence (2022: 26.83 pence) per share
111.7 101.5
In the six months to 30 September 2023 the 2022/23 interim and final dividends
were paid resulting in a cash outflow of £111.7 million.
Unaudited
Half year ended 30 September 2023 Half year ended 30 September 2022
£m £m
Proposed interim dividend for the year ended
31 March 2024: 14.04 pence per share (31 March 2023: 12.96 pence)
36.7 33.9
The proposed interim dividend has not been included as a liability in this
condensed half year financial information. The proposed interim dividend for
the year ending 31 March 2024 will be paid on 5 April 2024 to shareholders on
the register on 26 January 2024.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
10. Share capital
Allotted, called up and fully paid:
1 April 2022 to 30 September 2022 Unaudited
Number of shares
Treasury shares Ordinary shares £m
At 1 April 2022 ordinary shares of 61.05 pence each 5,628 264,841,320 161.7
For consideration of £1.7 million, shares issued in - 280,605 0.2
respect of the Company's Sharesave Scheme
Cancelled Shares (acquired via share buy-back)* - (3,910,503) (2.4)
At 30 September 2022 ordinary shares of 61.05 pence each 5,628 261,211,422 159.5
1 April 2023 to 30 September 2023 Unaudited
Number of shares
Treasury shares Ordinary shares £m
At 1 April 2023 ordinary shares of 61.05 pence each 5,628 261,315,489 159.5
For consideration of £0.1 million, shares issued in - 17,606 -
respect of the Company's Sharesave Scheme
At 30 September 2023 ordinary shares of 61.05 pence each 5,628 261,333,095 159.5
* During the period to 30 September 2022, the Group concluded the Buy-back
programme, with the total aggregate cost of the programme being £239.5
million. The Group purchased £39.9 million of ordinary shares from the market
at an average ordinary share price of 1,022 pence during H1 2022/23. The
shares acquired under the tender offer were immediately cancelled, creating a
capital redemption reserve of £2.4 million.
Shares held as treasury shares may be sold, re-issued for any of the Company's
share schemes, or cancelled.
The weighted average market price of the Company's shares at the date of
exercise of share scheme options during the period was 631 pence (H1 2022/23
941 pence).
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
11. Share premium account
Unaudited
1 April 2022 to 30 September 2022 £m
At 1 April 2022 235.5
Shares issued under the Sharesave Scheme 1.5
At 30 September 2022 237.0
1 April 2023 to 30 September 2023
At 1 April 2023 237.6
Shares issued under the Sharesave Scheme 0.1
At 30 September 2023 237.7
12. Capital redemption reserve
Unaudited
1 April 2022 to 30 September 2022 £m
At 1 April 2022 154.7
Share capital redeemed 2.4
At 30 September 2022 157.1
1 April 2023 to 30 September 2023
At 1 April 2023 157.1
Share capital redeemed -
At 30 September 2023 157.1
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
13. Cash flow from operating activities
Reconciliation of profit for the period to net cash inflow from operations: Unaudited
Half year ended 30 September 2023 Half year ended 30 September 2022
£m £m
Cash generated from operations
Profit for the period 1.8 18.5
Adjustments for:
Share-based payments 0.3 1.2
(Profit) / loss on disposal of property, plant and equipment (0.1) 0.1
Depreciation charge 80.8 75.6
Amortisation of intangible assets 1.7 1.8
Non-underlying costs 5.9 1.6
Share of post-tax profit from associated companies (0.5) -
Finance income (5.7) (3.4)
Finance costs 83.0 78.1
Taxation charge 1.4 2.4
Changes in working capital:
Decrease / (increase) in inventories 0.1 (1.0)
Increase in trade and other receivables (45.8) (14.5)
(Decrease) / increase in trade and other payables (31.0) 0.1
Cash impact of non-underlying costs (2.7) -
Decrease in provisions (0.4) (0.3)
Cash generated from operations 88.8 160.2
Unaudited
Half year ended 30 September 2023 Half year ended 30 September 2022
Total interest paid £m £m
Interest paid in operating activities 49.3 45.2
Interest paid in investing activities 4.1 1.6
Total interest paid 53.4 46.8
During the period the Group completed a number of sale and leaseback
transactions in respect of its infrastructure assets as part of its ongoing
finance arrangements. Cash proceeds of £24.8 million (H1 2022/23 £5.0
million) were received and a gain of £nil (H1 2022/23 £nil). These assets
are being leased back at market rates varying lease terms from 8.5 to 9 years.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
14. Net borrowings
Unaudited
Half year ended 30 September 2023 Year ended 31 March 2023
£m £m
Cash and cash deposits 94.4 165.4
Borrowings - current
Bank and other current borrowings (83.6) (92.7)
Lease obligations (45.5) (32.0)
Total current borrowings (129.1) (124.7)
Borrowings - non-current
Bank and other non-current borrowings (2,232.9) (1,960.9)
Listed preference shares (12.5) (12.5)
Lease obligations (1,046.7) (1,032.7)
Total non-current borrowings (3,292.1) (3,006.1)
Total net borrowings (3,326.8) (2,965.4)
For the purposes of the cash flow statement cash and cash deposits comprise:
Unaudited
Half year ended 30 September 2023 Year ended 31 March 2023
£m £m
Cash and cash deposits as above 94.4 165.4
Less: deposits with a maturity of three months or more (restricted funds) (21.7) (21.7)
72.7 143.7
Restricted funds of £21.7 million (31 March 2023 £21.7 million) are
deposited with lessors which are available for access, subject to being
replaced by an equivalent valued security.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
14. Net borrowings (continued)
The movements in net borrowings during the periods presented were as follows:
Unaudited
Net cash/ (borrowings) at 1 April 2022 Cash Transfer between non-current and current Other non-cash movements Net cash/ (borrowings) at 30 September 2022
flows
£m £m £m £m £m
Cash and cash deposits 519.0 (301.8) - - 217.2
Short-term loan receivable - 25.0 - - 25.0
Bank and other current borrowings (70.0) 0.2 (20.2) 0.1 (89.9)
Current lease obligations (170.2) 145.0 (11.7) 3.4 (33.5)
Bank and other non-current borrowings (1,907.4) (51.0) 20.2 (11.2) (1,949.4)
Listed preference shares (12.5) - - - (12.5)
Non-current lease obligations (1,041.8) (5.0) 11.7 0.4 (1,034.7)
Net borrowings (2,682.9) (187.6) - (7.3) (2,877.8)
Net cash/ (borrowings) at 1 April 2023 Cash Transfer between non-current and current Other non-cash movements Net cash/ (borrowings) at 30 September 2023
flows
£m £m £m £m £m
Cash and cash deposits 165.4 (71.0) - - 94.4
Bank and other current borrowings (92.7) 45.2 (36.1) - (83.6)
Current lease obligations (32.0) 9.0 (44.0) 21.5 (45.5)
Bank and other non-current borrowings (1,960.9) (300.1) 36.1 (8.0) (2,232.9)
Listed preference shares (12.5) - - - (12.5)
Non-current lease obligations (1,032.7) (24.8) 44.0 (33.2) (1,046.7)
Net borrowings (2,965.4) (341.7) - (19.7) (3,326.8)
The Group has entered into covenants with lenders and, while terms vary, these
typically provide for limits on gearing and interest cover. The Group has been
in compliance with its covenants during the year to date. Other non-cash
movements for the Group in the period includes the increase in borrowings from
interest which is rolled into the amount repayable.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
15. Fair value disclosure for financial instruments
Fair value of financial instruments carried at amortised cost.
Financial assets and liabilities which are not carried at an amount which
approximates to their fair value are:
Unaudited
Half year ended Year ended
30 September 2023
31 March 2023
Book value Fair value Book value Fair value
£m £m £m £m
Non-current borrowings:
Bank and other loans 2,232.9 1,986.4 1,960.9 1,791.4
Other non-current borrowings 12.5 18.9 12.5 21.5
Non-current borrowings excluding leases 2,245.4 2,005.3 1,973.4 1,812.9
Valuation hierarchy of financial instruments carried at fair value
The Group uses the following hierarchy for determining the fair value of
financial instruments by valuation technique:
× quoted prices (unadjusted) in active markets for identical assets or
liabilities (level 1)
× inputs other than quoted prices included within level 1 that are
observable for the asset or liability, either directly (that is, as prices) or
indirectly (that is, derived from prices) (level 2)
× Inputs for the asset or liability that are not based on observable
market data (that is, unobservable inputs) (level 3)
The fair value of financial instruments not traded in an active market (level
2, for example over-the-counter derivatives) is determined by using valuation
techniques. A variety of methods and assumptions are used based on market
conditions existing at each balance sheet date. Quoted market prices or dealer
quotes for similar instruments are used for long term debt. Other techniques,
such as estimated discounted cash flows, are used to determine fair value for
the remaining financial instruments. The fair value of interest rate swaps is
calculated as the present value of the estimated future cash flows.
The Group's financial instruments are valued principally using level 2
measures:
Unaudited
Half year ended 30 September 2023 Year ended 31 March 2023
£m £m
Level 2 inputs
Assets
Derivatives used for cash flow hedging 71.5 53.5
Derivatives used for fair value hedging 0.1 0.4
Total assets 71.6 53.9
Liabilities
Derivatives used for cash flow hedging (3.0) (4.8)
Derivative not in a hedge accounting relationship - -
Total liabilities (3.0) (4.8)
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
16. Retirement benefit assets
Defined benefit schemes
All the Group's defined benefit pension schemes are closed to future accrual.
The principal actuarial assumptions were the rate used to discount schemes'
liabilities and expected return on scheme assets with the same rate of 5.5%
(March 2023 4.70%) and the inflation assumption of 3.3% (March 2023 3.3%).
Unaudited
Half year ended Year ended
30 September 2023
31 March 2023
Present value of obligation Fair value of plan assets Total Present value of obligation Fair value of plan assets Total
£m £m £m £m £m £m
At beginning of period (719.5) 748.8 29.3 (985.9) 1,052.2 66.3
Amounts recognised in the (17.4) 17.0 (0.4) (27.5) 27.9 0.4
income statement
Remeasurements through other 43.5 (72.1) (28.6) 249.8 (288.8) (39.0)
comprehensive income
Company contributions - - - - 1.6 1.6
Benefits and expenses paid 21.2 (21.2) - 44.1 (44.1) -
At end of period (672.2) 672.5 0.3 (719.5) 748.8 29.3
Recognition of surplus on principal pension scheme
In accordance with IAS 19 'Employee Benefits' the value of the net pension
scheme surplus that can be recognised in the statement of financial position
is restricted to the present value of economic benefits available in the form
of refunds from the scheme or reductions in future contributions. In respect
of the Group's principal pension scheme, the surplus in the prior year has
been recognised as the Group believes that ultimately it has an unconditional
right to a refund of any surplus assuming the full settlement of the plan's
liabilities in a single event, such as a scheme wind up. The overall surplus
includes a net surplus of c.£7 million relating to the Bristol Water Section
of the Water Companies Pension Scheme (WCPS) which remains largely unchanged
as the liabilities of the scheme are fully insured through a bulk annuity
policy. The trustee of WCPS is in working through the process to wind up the
Bristol Water section of WCPS and has indicated its intention to return the
surplus to the Company. The surplus recognised is restricted by a tax
deduction of 35% under UK tax legislation.
17. Capital expenditure
Unaudited
Half year ended 30 September 2023 Year ended 31 March 2023
£m £m
Property, plant and equipment
Additions 239.1 353.7
Assets adopted at fair value 7.2 2.8
Net book value of disposals (0.1) 0.3
Intangible assets
Additions 27.2 4.6
Net book value of disposals - -
Capital commitments
Contracted but not provided for the Group 115.2 72.0
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
17. Capital expenditure (continued)
Additions to intangible assets during the period include £26.1m as a result
of acquiring renewable energy sites with rights to generate energy in the
future. The sites acquired have been accounted for under "asset purchase"
accounting as opposed to "business combination" accounting, having considered
the facts and circumstances surrounding the sites acquired. The identifiable
assets and liabilities in this transaction, initially measured at an amount
other than cost, have been measured at the amounts specified in the relevant
accounting standards. The residual transaction price has then been allocated
to the remaining identifiable assets and liabilities based on their relative
fair values at the date of the acquisition, including the £26.1m of
intangible assets as stated above. The intangible assets acquired relate to
energy generation rights on all three sites purchased and a battery energy
storage system on a single site, these assets will be amortised over periods
expected to be between 35 to 45 years in line with the rights acquired.
18. Trade and other payables & other non-current liabilities
Unaudited
Half year ended 30 September 2023 Year ended 31 March 2023
£m £m
Trade and other payables - current
Trade payables 125.3 150.7
Contract liabilities 7.8 3.7
Other tax and social security 4.0 3.4
Accruals 23.3 44.3
Other payables 50.5 23.3
210.9 225.4
Other non-current liabilities
Contract liabilities 152.7 155.3
19. Contingencies and Financial Guarantee
Financial Guarantee
Unaudited
Half year ended 30 September 2023 Year ended 31 March 2023
£m £m
Performance bonds 9.7 9.7
Guarantees in respect of performance bonds are entered into in the normal
course of business. No liability has arisen and is not expected to arise in
respect of these guarantees.
Contingency
Other contractual and litigation uncertainties
Ofwat and the Environment Agency announced an industry-wide investigation into
sewage treatment works on 18 November 2021. On 27 June 2022, as part of its
ongoing investigation, Ofwat announced enforcement action against South West
Water Limited, the company is now included alongside the five companies which
received enforcement notices in March 2022. The company will continue to work
openly with Ofwat to comply with the notice as part of this ongoing
investigation. The potential outcome of these investigations continues to be
unknown.
On 23 May 2023 Ofwat announced an investigation into South West Water's
2021/22 operational performance data relating to leakage and per capita
consumption. This operational performance data was reported in South West
Water's Annual Performance Report 2021/22. This report is subject to
rigorous assurance processes which include independent checks and balances
carried out by an external technical auditor. The company will work openly and
constructively with Ofwat to comply with the formal notice issued to South
West Water as part of this investigation. The potential outcome of this
investigation is currently unknown.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
19. Contingencies and Financial Guarantee (continued)
The Group establishes provisions in connection with contracts and litigation
where it has a present legal or constructive obligation as a result of past
events and where it is more likely than not an outflow of resources will be
required to settle the obligation and the amount can be reliably estimated.
Where it is uncertain that these conditions are met a contingent liability is
disclosed unless the likelihood of the obligation arising is remote or the
matter is not deemed material.
20. Related party transactions
Group companies entered into the following transactions with joint ventures
which were not members of the Group. Bristol Wessex Billing Services Limited
("BWBSL") and Water 2 Business Limited ("Water 2 Business") are joint venture
investments of Bristol Water plc.
Transactions with joint ventures Unaudited
Half year ended 30 September 2023 Half year ended 30 September 2022
£m £m
Sales to Water 2 Business 9.6 8.9
Purchases from BWBSL 2.0 1.4
Balances with joint ventures Unaudited
Half year ended 30 September 2023 Year ended 31 March 2023
£m £m
Trade and other receivables
Water 2 Business (including loan receivable of £9.0m, 10.6 10.8
2022: £9.6m)
BWBSL 3.5 1.6
Trade and other payables
BWBSL 1.6 -
Pennon Group plc
Registered office:
Peninsula House
Rydon Lane
Exeter
Devon
EX2 7HR
pennon-group.co.uk
Registered
in England: 2366640
PENNON GROUP PLC
DIRECTORS' RESPONSIBILITIES STATEMENT
The Directors named below confirm on behalf of the Board of Directors that
this unaudited condensed half year financial information has been prepared in
accordance with UK adopted IAS 34 "Interim financial reporting" and to the
best of their knowledge the interim management report herein includes a fair
review of the information required by DTR 4.2.4, DTR 4.2.7R and DTR 4.2.8R of
the Disclosure and Transparency Rules, being an indication of important events
that have occurred during the period and their impact on the unaudited
condensed half year financial information; a description of the principal
risks and uncertainties for the remaining six months of the current financial
year; and the disclosure requirements in respect of material related party
transactions.
The Directors are responsible for the maintenance and integrity of the
Company's website. Legislation in the United Kingdom governing the preparation
and dissemination of financial information may differ from legislation in
other jurisdictions.
The Directors of Pennon Group plc at the date of the signing of this
announcement and statement are:
Gill Rider
Iain Evans
Claire Ighodaro
Jonathan Butterworth
Dorothy Burwell
Loraine Woodhouse
Susan Davy
Paul Boote
Steven Buck
For and on behalf of the Board of Directors who approved this half year report
on 28 November 2023.
S J Davy P M Boote
Group Chief Executive Officer Group Chief Financial Officer
PENNON GROUP PLC
INDEPENDENT REVIEW REPORT TO PENNON GROUP PLC
Conclusion
We have been engaged by the Company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended 30
September 2023 which comprises Consolidated income statement, the Consolidated
statement of comprehensive income, the Consolidated balance sheet, the
Consolidated statement of changes in equity, the Consolidated statement of
cash flows and related notes. We have read the other information contained in
the half yearly financial report and considered whether it contains any
apparent misstatements or material inconsistencies with the information in the
condensed set of financial statements.
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended 30 September 2023 is not prepared,
in all material respects, in accordance with UK adopted International
Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of
the United Kingdom's Financial Conduct Authority.
Basis for conclusion
We conducted our review in accordance with International Standard on Review
Engagements 2410 (UK) "Review of Interim Financial Information Performed by
the Independent Auditor of the Entity" (ISRE) issued by the Financial
Reporting Council. A review of interim financial information consists of
making enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review procedures. A
review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing (UK) and consequently does not enable
us to obtain assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not express an audit
opinion.
As disclosed in note 2, the annual financial statements of the Group are
prepared in accordance with UK adopted international accounting standards. The
condensed set of financial statements included in this half-yearly financial
report has been prepared in accordance with UK adopted International
Accounting Standard 34, "Interim Financial Reporting".
Conclusions Relating to Going Concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis for Conclusion section of this report,
nothing has come to our attention to suggest that management have
inappropriately adopted the going concern basis of accounting or that
management have identified material uncertainties relating to going concern
that are not appropriately disclosed.
This conclusion is based on the review procedures performed in accordance with
this ISRE, however future events or conditions may cause the entity to cease
to continue as a going concern.
Responsibilities of the directors
The directors are responsible for preparing the half-yearly financial report
in accordance with the Disclosure Guidance and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
In preparing the half-yearly financial report, the directors are responsible
for assessing the Company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and using the
going concern basis of accounting unless the directors either intend to
liquidate the company or to cease operations, or have no realistic alternative
but to do so.
Auditor's responsibilities for the review of the financial information
In reviewing the half-yearly report, we are responsible for expressing to the
Company a conclusion on the condensed set of financial statements in the
half-yearly financial report. Our conclusion, including our Conclusions
Relating to Going Concern, are based on procedures that are less extensive
than audit procedures, as described in the Basis for Conclusion paragraph of
this report.
Use of our report
This report is made solely to the Company in accordance with guidance
contained in International Standard on Review Engagements 2410 (UK) "Review of
Interim Financial Information Performed by the Independent Auditor of the
Entity" issued by the Financial Reporting Council. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other
than the Company, for our work, for this report, or for the conclusions we
have formed.
Ernst & Young LLP
London
28 November 2023
PENNON GROUP PLC
Alternative performance measures
Alternative performance measures (APMs) are financial measures used in this
report that are not defined by International Financial Reporting Standards
(IFRS). The Directors believe that these APMs assist in providing additional
useful information on the underlying trends, performance and position of the
Group as well as enhancing the comparability of information between reporting
periods.
As the Group defines the APMs they might not be directly comparable to other
companies' APMs. They are not intended to be a substitute for, or superior to,
IFRS measurements. The following APMs have been added or amended to those
presented previously:
· Group dividend cover is not presented in the half year APM
disclosure. The ratio represents a measure of full year adjusted profit and
dividend performance and cannot be calculated on a comparable basis using half
year adjusted profits and the interim dividend.
· Return on capital employed is not presented in the half year APM
disclosure. This ratio represents the total of underlying operating profit by
capital employed (net debt plus total equity invested). An average value for
this metric is part of the long-term incentive plan for Directors.
(i) Underlying earnings
Underlying earnings are presented alongside statutory results as the Directors
believe they provide a more useful comparison on business trends and
performance. Note 5 in the notes to the financial statements provides more
detail on non-underlying items, and a reconciliation of underlying earnings
for the current year and the prior year is as follows:
Non-underlying items
Underlying earnings reconciliation Underlying Restructuring / transformation costs Drought Renewables acquisition Statutory results Earnings
per share
30 September 2023
£m £m £m p
EBITDA (see below) 168.5 (3.6) (1.8) (0.5) 162.6
Operating profit 85.9 (3.6) (1.8) (0.5) 80.0
Profit before tax 9.1 (3.6) (1.8) (0.5) 3.2
Taxation (2.8) 0.1 0.4 0.9 (1.4)
Profit after tax 1.8
Non-controlling interests (0.4)
Profit after tax attributable to shareholders 1.4 0.5
Non-underlying items
Underlying earnings reconciliation Underlying Bristol integration costs Statutory results Earnings
per share
30 September 2022
£m £m £m p
EBITDA (see below) 174.6 (1.6) 173.0
Operating profit 97.2 (1.6) 95.6
Profit before tax 22.5 (1.6) 20.9
Taxation (2.7) 0.3 (2.4)
Profit after tax 19.8 (1.3) 18.5
Non-controlling interests (0.2)
Profit after tax attributable to shareholders 18.3 7.0
PENNON GROUP PLC
Alternative performance measures (continued)
(ii) Underlying EBITDA
Underlying EBITDA (earnings before interest, tax, depreciation and
amortisation and non-underlying items) is used to assess and monitor
operational underlying performance.
(iii) Effective interest rate
A measure of the mean average interest rate payable on net debt associated
with South West Water Limited's group of companies which excludes interest
costs not directly associated with net debt. This measure is presented to
assess and monitor the relative cost of financing for South West Water.
H1 2024 H1 2023
£m £m
Net finance costs before non-underlying items (note 6) 77.3 74.7
Remove: net finance income before non-underlying items not associated with 3.6 3.4
South West Water Limited's group of companies
Net finance costs before non-underlying items associated with South West Water 80.9 78.1
Limited's group of companies
Net interest on retirement benefit obligations associated with South West 0.7 1.0
Water Limited's group of companies
Capitalised interest (note 6) 4.1 1.6
Net finance costs for effective interest rate calculation 85.7 80.7
Group net debt (opening) (note 14) 2,965.4 2,682.9
Remove: opening net debt not associated with South West Water Limited's group (100.1) 27.6
of companies
Opening net debt for calculation 2,865.3 2,710.5
Group net debt (closing) (note 14) 3,326.8 2,877.8
Remove: closing net debt not associated with South West Water Limited's group (235.4) (69.8)
of companies
Closing net debt for calculation 3,091.4 2,808.0
Average net debt (opening net debt + closing net debt divided by 2) 2,978.4 2,759.3
Effective interest rate (%) 5.8 5.8
(iv) Effective cash cost of interest
Effective cash cost of interest for South West Water Limited's group of
companies is based on the effective interest cost calculation above, but
excludes finance costs that are not paid in cash, but accrete to the carrying
value of debt (principally the inflationary impact of indexation on
index-linked debt).
H1 2024 H1 2023
£m £m
Net finance costs for effective interest rate calculation (as above) 85.7 80.7
Remove non-cash interest accrued (income statement indexation charge) (28.7) (38.8)
Net finance costs for effective cash cost of interest calculation 57.0 41.9
Opening net debt (as above) 2,865.3 2,710.5
Closing net debt (as above) 3,091.4 2,808.0
Average net debt (opening net debt + closing net debt divided by 2) 2,978.4 2,759.3
Effective cash cost of interest (%) 3.8 3.0
PENNON GROUP PLC
Alternative performance measures (continued)
(v) Underlying interest cover
Underlying net finance costs (excluding pensions net interest cost) divided by
operating profit before non-underlying items.
H1 2024 H1 2023
£m £m
Net finance costs after non-underlying items 77.3 74.7
Net interest on retirement benefit obligations 0.7 1.0
Net finance costs for interest cover calculation 78.0 75.7
Operating profit before non-underlying items 85.9 97.2
Interest cover (times) 1.1 1.3
(vi) Capital investment
Property, plant and equipment and intangible asset additions. The measure is
presented to assess and monitor the total capital investment by the Group.
H1 2024 H1 2023
£m £m
Additions to property, plant and equipment 239.1 140.2
Additions to intangible assets 27.2 2.4
Capital investment 266.3 142.6
(vii) Capital payments
Payments for property, plant and equipment (PPE) and intangible asset
additions net of proceeds from sale of PPE and intangible assets. The measure
is presented to assess and monitor the net cash spend on PPE and intangible
assets.
H1 2024 H1 2023
£m £m
Cash flow statements: purchase of property, plant and equipment 249.8 153.0
Cash flow statements: purchase of intangible assets 20.7 2.4
Cash flow statements: proceeds from sale of property, plant and equipment (0.2) -
Capital payments 270.3 155.4
PENNON GROUP PLC
Alternative performance measures (continued)
(viii) Return on Regulated Equity (RORE)
This is a key regulatory metric which represents the returns to shareholders
expressed as a percentage of regulated equity.
Returns are made up of a base return (set by Ofwat, the water business
regulator, at c.3.9% for South West Water and c.4.4% for Bristol Water for the
period 2020-25) plus Totex (see ix) outperformance, financing outperformance
and ODI outperformance. Returns are calculated post tax and post sharing (only
a proportion of returns are attributed to shareholders and shown within RoRE).
The three different types of return calculated and added to the base return
are:
· Totex outperformance - Totex is defined below, and outperformance
is the difference between actual reported results for the regulated business
compared to the Final Determination (Ofwat published document at the start of
a regulatory period), in a constant price base
· Financing outperformance - is based on the difference between a
company's actual effective interest rate compared with Ofwat's allowed cost of
debt
· ODI outperformance - the net reward or penalty a company earns
based on a number of different key performance indicators, again set in the
Final Determination.
Regulated equity is a notional proportion of regulated capital value (RCV
which is set by Ofwat at the start of every five-year regulatory period,
adjusted for actual inflation). For 2020-25, the notional equity proportion is
40.0%.
References are made to Ofwat RORE and Watershare RORE which utilise differing
inflation assumptions and the disclosure of tax.
Further information on this metric can be found in South West Water's annual
performance report and regulatory reporting, published in July each year.
(ix) Total Expenditure (Totex)
Operating costs and capital expenditure of the regulated water and wastewater
business (based on the Regulated Accounting Guidelines).
(x) Outcome Delivery Incentive (ODI)
ODIs are designed to incentivise companies to deliver improvements to service
and outcomes based on customers' priorities and preferences. If a company
exceeds these targets a reward can be earned through future higher revenues.
If a company fails to meet them, they can incur a penalty through lower future
allowed revenues.
(#_ftnref1) (^) Measures with this symbol are defined in the Alternative
Performance Measures (APMs) as outlined on pages 67 to 70
1 Non-underlying items are adjusted for by virtue of their size, nature or
incidence to enable a full understanding of financial performance
2 (#_ftnref2) Dividend policy of CPIH + 2%. The CPIH rate used is 6.3% as of
30 September 2023.
3 (#_ftnref3) RCV growth over K7 forecast to be 60%, and RCV growth over K8
forecast to be c.40%
4 (#_ftnref4) Total H1 2023/24 capital expenditure - £266.3 million,
including £31.7 million - Pennon Power
5 (#_ftnref5) For all bathing waters where South West Water has assets which
may potentially impact water quality. Based on our preliminary analysis of
Environment Agency data ahead of formal publication of results, anticipated at
the end of November
6 (#_ftnref6) Total reservoir storage for Devon and Cornwall - 64% as at 30
September 2023 v 31% as at 30 September 2022
7 (#_ftnref7) Return on regulated equity calculated on Ofwat basis,
excluding re-investment in additional commitments
8 (#_ftnref8) As at 30 September 2023 - total reservoir storage 64%, 30
September 2022 - total reservoir storage 31%. Total reservoir storage as at 27
Nov 2023 - 77%, compared to 49% at the same point in 2022.
9 (#_ftnref9) RCV growth over K7 forecast to be c.60%, and RCV growth over
K8 forecast to be c.40%
10 (#_ftnref10) Pennon Water Services: 80:20 joint venture with South
Staffs, water2business: 30% share of a joint venture with Wessex Water.
11 (#_ftnref11) Includes wholesale costs for non-household customers.
12 (#_ftnref12) Carrying value of fair value acquisition adjustments to net
debt as at 30 September 2023 - £34.6 million Bournemouth Water, £83.5
million Bristol Water.
13 (#_ftnref13) Based on South West Water Limited's group of companies,
including Bristol Water plc
14 (#_ftnref14) Based on South West Water net debt and shadow RCV
15 (#_ftnref15) UK water position as at 31 March 2022 as per published
Annual Performance Reports - weighted average.
16 (#_ftnref16) Based on current market pricing and current hedged position
of c.95% for 2023/24 and c.45% for 2024/25.
17 (#_ftnref17) Rivers not achieving good ecological status
18 (#_ftnref18) Based on Environment Agency August 2022 data publication
(https://environment.data.gov.uk/catchment-planning/RiverBasinDistrict/8) .
19 (#_ftnref19) From 130,000 tonnes (2021) to 80,000 tonnes (2023).
20 (#_ftnref20) Includes c.£40m WaterShare+, c.£10m Stop The Drop, c.£40m
customer support unlocked.
21 (#_ftnref21) ODIs on track or within regulatory tolerances.
22 (#_ftnref22) Performance as at HY2023/24, excluding PCC (end of AMP ODI)
given the current industry wide review by Ofwat to understand the impact and
enduring effects of Covid-19 on this measure
23 (#_ftnref23) H1 2023/24 reflects 50% of full year assumptions
24 (#_ftnref24) This is made up of c.£(40) million Totex^, c.£250 million
financing, net of c.£20 million ODI penalty Outperformance is calculated on a
regulatory post sharing basis for totex, and on a voluntary post sharing of
embedded debt basis for financing.
25 (#_ftnref25) Calculated post the impact of embedded cost of debt
(voluntary) sharing mechanism (WaterShare+)
26 (#_ftnref26) Calculated post the impact of regulatory totex sharing
mechanism
27 (#_ftnref27) Watershare RORE - financing outperformance is based on the
outturn effective interest rate translated into a real rate using a forecast
average inflation assumption of 4.4% CPIH.
28 (#_ftnref28) Including: additional amounts allocated for water resilience
(c.£125 million), WaterFit investments (c.£45 million) in addition to c.£40
million reflecting the underlying totex position compared to the final
determination. This underlying c.£40 million is used in our RORE metrics
presented in this document to best reflect the true position compared to the
original determination.
29 (#_ftnref29) Based on current market pricing and current hedged position
of c.95% for 2023/24
30 (#_ftnref30) Based on South West Water (South West Water Limited group of
companies including Bristol Water plc) net debt and shadow RCV.
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