Company Announcements

PENNON GROUP

30 September 2022

TRADING STATEMENT

Pennon Group announces the following trading update for the period ended 30 September 2022.

Pennon's half year 2022/23 results will be announced on 30 November 2022.

Key Highlights

·    Trading in line with expectations given volatile macro-economic environment

·    Resilient operational delivery through challenging conditions

·    Delivering our WaterFit plans, improving river and bathing water quality outcomes

·    Strategically well positioned to maintain cumulative doubling of RORE base returns

·    Supporting customers - sharing c.£20 million of outperformance via WaterShare+

·    Investing in environmental enhancement and resilience - expected c.30% increase in capital investment compared to the same period last year

·    Disciplined capital allocation - c.£160 million ringfenced for investment in renewable energy generation.

Resilient operational delivery through challenging conditions

Operationally, we are maintaining our momentum of performance on outcome delivery incentives (ODIs). South West Water delivered the second highest ODI performance in the sector for 2021/22, and as a Group we are on track for a net positive ODI outcome in 2022/23.

Our dedicated operational teams are delivering a resilient service to our customers and communities through a period which has seen significant population increases, with our highest ever demand recorded and the driest weather in the South West of England for over 100 years.

·    Following our drought plan, which is focused on supporting customer supplies and the environment through this period, we have implemented a range of operational interventions including increasing connectivity in the region, investments to bring additional resources into operation and increasing water efficiency initiatives, including enhanced customer engagement campaigns to use water wisely. In August we made the responsible decision to introduce a temporary hosepipe ban for Cornwall and parts of North Devon to protect the environment and customer supplies for parts of our region. Customers have also had the opportunity to obtain free water efficiency devices including water butts and find and fix leakage services.  

·    Responding to the resilience challenge, we are repurposing a disused quarry, Hawkstor, purchased in March 2022, alongside pursuing longer-term investments including Cheddar 2 Reservoir in the Bristol region which will be included in our forthcoming Water Resource Management Plan.

·    Given the focus on water efficiency, we continue to target year on year leakage reductions in line with the delivery of our 15% business plan commitment to 2025. South West Water and Bristol Water were the 3rd and 4th best performing companies for leakage[1] in 2021/22, with South West Water on track deliver a 9% reduction in leakage from 2020.

Having launched in April our WaterFit plans which are targeting coastal and river water quality improvements, South West Water is on track to complete the installation of monitors at 100% of our storm overflows during the year, ahead of our 2023 target date. Releases from storm overflows have reduced by one third year to date, when compared to the same period last year.  

Our underlying performance across all Environmental Performance Assessment (EPA) metrics is improving, including a continuation of the trend of overall pollution reductions. With ratcheting targets, we do not anticipate a change in the Environment Agency's EPA for 2022, despite improving underlying metrics, but we are on a trajectory that would result in achieving our target of 4* status for 2024. 

Supporting our customers

We recognise the pressure that the current cost-of-living crisis places on many of our customers. Our broad range of affordability measures ensures we are able to support those in need, with over 100,000 customers across our regions benefiting. 

In April we also announced plans to accelerate sharing an additional c.£20 million of outperformance with households across South West Water, Bristol Water and Bournemouth Water as part of our unique WaterShare+ scheme, providing further financial support at a time when customers need it most.

Strategically well positioned to drive RORE

For 2022/23 we continue to anticipate a cumulative doubling of base returns[2] on regulated equity (RORE), with the structure of our financing portfolio driving significant financial outperformance, more than offsetting the adverse impact of inflation on totex performance (noting cumulative totex remains within our FD allowances).

As previously flagged, whilst the Group's revenues and RCV grow with inflation, offsetting cost increases over the long-term, near-term earnings are reduced through higher interest charges and operating costs such as power.

·    Our agile and efficient financing strategy positions us well in this current high inflationary environment, and whilst our relatively low level of index linked debt minimises the impact of inflation compared to the UK water sector average, financing costs will be elevated for 2022/23. Of the Group's c.£3.2 billion gross debt[3], around 29% is index-linked, with the vast majority of this being RPI linked. This broadly equates to an additional £8 million in financing costs per 1% increase in inflation.

·    For 2022/23, >95% of the Group's energy usage is hedged and we anticipate total power costs across the Group will now be around c.£50 million[4] higher than the 2021/22 total power cost of c.£56 million.

As a result of the Government's recently announced reversal on the planned corporation tax increase from 19% to 25%, we are anticipating a deferred tax credit of around c.£120 million which we expect to be recognised during the second half of the financial year, subject to being substantially enacted into Law.

Investing in environmental enhancement and resilience

Our c.£1.4 billion[5] environmental investment programme - our largest for over 15 years - is now well underway, focused on delivering benefits for customers, communities and the environment.

In the first half of the year we have invested significantly to support the delivery of our suite of 2020-25 business plan environmental commitments, including the development of our new water treatment works in the Bournemouth region, alongside continued investments driving improvements in leakage and wastewater pollutions performance. This investment is supplemented by additional Green Recovery and WaterFit investment, embracing innovative and nature-based solutions that will drive further environmental enhancements, including coastal and river water quality projects, faster. 

Investing in renewable energy generation

In order to significantly accelerate the Group's pathway to c.50% self-generation by 2030, and our wider environmental Net Zero 2030 commitment, we are now planning to invest the remaining c.£160 million, of the up to c.£400 million originally set out for Pennon's share buy-back, in renewable energy generation projects. These projects would supply power to our UK water businesses, reducing our reliance on wholesale power markets.

By investing in self-generation and the supply of power to our water businesses, this capital allocation aligns with the Board's highly disciplined approach seeking out opportunities to drive growth in UK water. The Board is confident that the investments being considered will deliver attractive returns and sustainable results into the long-term, benefiting customers, shareholders and the environment.

Bristol Water - delivering our proven integration blueprint

Following the CMA's clearance of the Bristol Water merger with South West Water earlier this year, delivery of the Group's 24-month process integration plan is now underway.

The process to merge Bristol Water's licence into South West Water's is in progress and we are on track to launch the second issuance of our unique WaterShare+ scheme to customers during 2022/23, which will also enable our Bristol Water customers to share in the success of the Group.

Sustainable financing

Since March 2022 c.£250 million of new and renewed funding has been raised through Pennon's Sustainable Financing Framework, and we continue to target raising all new financing through the framework.

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 2022 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.