Company Announcements

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] 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]^,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] 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] 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 

Conference call dial in details:

United Kingdom:                      020 3936 2999

All other locations:                   +44 20 3936 2999

Passcode:                                527378 

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/ 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.