REG - Pennon Group PLC - Trading Statement

PennonAnnouncement

12/04/2022 07:00

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RNS Number : 0338I  Pennon Group PLC  12 April 2022

PENNON GROUP

12 April 2022

TRADING STATEMENT

Pennon Group, one of the leading water groups in the UK, announces the
following trading update ahead of its results for the year ended 31 March
2022, which will be announced on 31 May 2022.

A spotlight presentation for investors and analysts will be held at 08:30am
today, followed by live Q&A at 09:30am.

Key Highlights

·     Pennon remains on track to deliver resilient financial and
operational performance across the Group in line with management expectations
- continued South West Water RORE outperformance run rate

·     CMA clearance for Bristol Water merger with South West Water -
integration process underway, synergies targeting c.£20 million per annum
identified across the Group by 2024/25

·     Largest environmental investment programme in 15 years of c.£1.4
billion, across South West Water and Bristol Water well underway

·     Planned acceleration and additional spend of c.£150 million in the
current regulatory period, funded by re-investment of RORE outperformance
announced to date, driving RCV growth

·     £200 million of the share buy-back programme delivered so far -
further phases expected to commence, subject to review of growth opportunities

·     Continuing to support customers, with a bill cut for 2022/23, and
bills lower than they were 10 years ago for South West Water customers.

Bristol Water Integration

Following the CMA's clearance of the Bristol Water merger with South West
Water on 7 March 2022, we are pleased to be able to update on the integration
which is anticipated to complete over the next 24 months.

Synergies of c.£20 million per annum by 2024/25 have been identified across
the Group through service improvements, driving supply chain efficiencies,
creating common systems and processes, and sharing best practice. We expect
the profile of these efficiencies to ramp up to deliver c.£50 million over
K7, with one-off, non-underlying integration costs of c.£10 million
anticipated.

Pennon will retain the valuable Bristol Water brand and will continue to
deliver the existing PR19 business plans of both South West Water and Bristol
Water. For PR24, the combined entity will deliver for all our regulated water
customers in accordance with a single business plan, with separate price
controls.

Environmental Investments and Customer Returns

We have made good progress in delivering our £1.4 billion 1  (#_ftn1)
environmental investment programme for South West Water and Bristol Water,
driving RCV growth in K7. This is Pennon's largest environmental investment
programme for over 15 years. In line with our K7 delivery profile, capital
investment has increased c.20% year on year, with schemes focused on
increasing resilience, improving water quality, and protecting and enhancing
the natural environment.

We are announcing today our WaterFit plans for 2022-25, outlining how we will
play our part, working with partners, customers, visitors and local
communities to protect and enhance the South West's waters for future
generations. Our plans incorporate wastewater investments of c.£330 million
over this period, which will improve the quality of the region's rivers and
seas. Of this investment, c.£45 million will be funded by reinvesting totex
efficiencies realised to date, on new projects. This, together with
pre-funding of our Green Recovery initiatives and planned acceleration of our
second c.£20 million WaterShare+ return to customers equates to accelerated
and additional spend of c.£150 million in K7.

This acceleration and additional spend will be funded by South West Water's K7
RORE outperformance announced to date, consisting of c.£94 million in totex
efficiency and c.£60 million financing outperformance.

Resilient Financial and Operational Performance

Financial performance has remained resilient across the Group despite the
challenging macro-economic environment.

As we enter the summer period, our water resources remain in a robust position
with reservoir storage at c.93%. We continue to look for strategic value
enhancing opportunities in this area having recently procured a site for
development in our region.

For South West Water, we continue to anticipate RORE outperformance to a level
which doubles base returns 2  (#_ftn2) (,3) with the elevated inflationary
environment skewing outperformance from totex, where costs are increasing,
into financing, where the Group benefits from a relatively low level of index
linked debt. ODI financial performance is expected to improve from the prior
year 3  (#_ftn3) as a result of our improved leakage and pollutions
performance. Overall, we anticipate around c.80% of South West Water's ODIs
will be on track or ahead of target, for the year. For Bristol Water we
anticipate RORE performance to be marginally below their allowed base returns
for this current year.

South West Water's wastewater Pollutions Incident Reduction Plan continues to
deliver results, although we recognise that there is still more to do in this
area as our targets become more stringent, impacting our relative EPA
performance. Our steadfast focus remains in this area as we work to deliver a
meaningful step change in performance.

Whilst long-term protection from the increasing inflationary environment is
provided through inflation linked revenues and RCV growth, along with
regulatory true-ups, we continue to expect our cost base to be impacted in the
near term by:

·     26% of Pennon's regulated water businesses' gross debt of £3.1
billion 4  (#_ftn4) is index linked, meaning a 1% increase in inflation
results in an additional £8 million of financing costs.

·     Wholesale power costs account for c.10% of Pennon's regulated water
businesses' operating costs. Pennon is c.60% hedged for 2022/23 and, as such,
has c.40% exposure to wholesale market prices, which have increased
significantly over recent weeks given the current geopolitical situation.

We recognise the pressure that inflationary pricing increases may pose to our
customers. Our broad range of affordability measures ensures we are able to
support those in need of support, and we are pleased that for the coming year
bills will continue to be lower than they were 10 years ago, driven by our
continued focus on delivering improvements efficiently and effectively.

Share Buy-back

The buyback programme is progressing well with c.£200 million complete to
date. Further phases are expected to commence over the period to 30 September
2022 to complete our up to c.£400 million programme, subject to our continued
review of further growth opportunities in UK water, and in line with our
established financial disciplines.

Spotlight Presentation and Conference Call

A presentation providing further detail on Pennon's investment in Bristol
Water and the environment will be hosted by Susan Davy and Paul Boote today at
08:30am, followed by a live Q&A conference call at 09:30am.

Please register here: https://www.pennon-group.co.uk/investor-information
(https://www.pennon-group.co.uk/investor-information)

Conference call dial in details:

United Kingdom:                      020 3936 2999

All other locations:                   +44 20 3936 2999

Passcode:
527378

 

 For further information, please contact:

 Pennon Group plc                                    +44 (0)1392 443 168

 Paul Boote              Group Finance Director

 Jennifer Cooke          Head of Investor Relations

 Media Enquiries                                     +44 (0)207 251 3801

 James Murgatroyd        Finsbury

 Harry Worthington

 

Cautionary statement in respect of forward-looking statements

Certain statements in this announcement are forward-looking statements
relating to the Group's operations, performance and financial position based
on current expectations of, and assumptions and forecasts made by, management.
They are subject to a number of risks, uncertainties and other factors that
could cause actual results, performance or achievements of the Group to differ
materially from any outcomes or results expressed or implied by such
forward-looking statements.

The Group's principal risks were described in the 2021 Pennon Group Annual
Report which can be viewed online at http://annualreport.pennon-group.co.uk/
(http://annualreport.pennon-group.co.uk/)  Such forward looking statements
should therefore be construed in light of such risks, uncertainties and other
factors and undue reliance should not be placed on them. They are made only as
of the date of this announcement 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.

No obligation is accepted to publicly revise or update 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. Nothing in this
Statement should be construed as a profit forecast.

 

 1  (#_ftnref1) Capital investment as per Final Determinations, using forecast
inflation of 3.1% CPIH, and including Green Recovery investments.

 2  (#_ftnref2)  WaterShare RORE inflation assumptions have been updated to
reflect the current increasing inflationary environment, using an average
assumption for the K7 regulatory period of 3.1%.

 3  (#_ftnref3)  Excluding potential impact of third-party event at Carland
Cross, Cornwall. In late August a third-party utility company, performing work
unconnected with South West Water, damaged mains supply pipes at Carland Cross
in Cornwall, causing a localised loss of supply. Any impact from this event in
terms of ODI mechanism remains under evaluation.

 4  (#_ftnref4) Gross debt as at H1 2021/22. Water Business net debt at H1
2021/22 was £2.6 billion.

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