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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 GBP448.6m GBP425.5m +5.4%
Underlying profit before tax GBP9.1m GBP22.5m (59.6%)
Non-underlying items before tax (GBP5.9m) (GBP1.6m) -
[1]
Profit after tax GBP1.8m GBP18.5m (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] 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
-- GBP9.1 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 GBP5.9 million -
includes one-off costs of business transformation, drought and
renewable energy acquisitions
-- Statutory profit after tax of GBP1.8 million (H1 2022/23: GBP18.5 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] to 2030
-- c.GBP1.6 billion K7 (2020-25) investment well underway -
delivering sustainable environmental improvements across our region
- GBP234 million [4] 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.GBP16
million annualised synergies to date.
Making progress on what matters most across our region
-- 100% bathing water quality for the third consecutive year [5]
-- Breaking the cycle of drought - reservoir levels more than
doubled compared to 2022 [6] , 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
GBP90 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.GBP145 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] 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 - GBP4.5 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 .
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
Global Dial-In Numbers
Conference passcode: 803418
For further information, please contact:
01392 443
Paul Boote Group Chief Financial Officer 168
Jennifer Cooke Group Head of Investor Relations
020 7251
James Murgatroyd FGS Global 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.GBP1.6 billion
-- 135 GWh of renewable energy generation, through c.GBP145
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] , 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.GBP125 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 GBP100 million in our WaterFit plan to 2025,
including GBP45 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.GBP145 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.GBP20
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 GBP90 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] .
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.GBP145 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] , 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
GBP2.8 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 2024 Annual Report and Accounts Published
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 GBP300 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 GBP448.6m GBP425.5m +5.4%
Power (GBP55.2m) (GBP48.7m) (13.3%)
Operating costs (GBP224.9m) (GBP202.2m) (11.2%)
EBITDA(^) GBP168.5m GBP174.6m (3.5%)
Depreciation and amortisation (GBP82.6m) (GBP77.4m) (6.7%)
Operating profit GBP85.9m GBP97.2m (11.6%)
Net interest charge (GBP77.3m) (GBP74.7m) (3.5%)
Share of associated companies GBP0.5m - -
PAT
Profit before tax GBP9.1m GBP22.5m (59.6%)
---------------------------------- ------------- ------------- -------
Non-underlying items before tax (GBP5.9m) (GBP1.6m) -
(1)
Profit before tax GBP3.2m GBP20.9m (84.7%)
Underlying tax charge (GBP2.8m) (GBP2.7m) (3.7%)
Non-underlying tax credit GBP1.4m GBP0.3m -
Profit for the period GBP1.8m GBP18.5m (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 GBP266.3m GBP142.6m +86.7%
South West Water GBP234.4m GBP142.5m +64.5%
Pennon Power GBP31.7m - -
Other GBP0.2m GBP0.1m +100.0%
30 September 30 September
2023 2022
Total Group net debt (GBP3,326.8m) (GBP2,877.8m)
The Group's statutory and underlying revenue has increased from
GBP425.5 million to GBP448.6 million, an increase of 5.4%, with
South West Water's revenue increased by GBP14.0 million with
inflationary tariff increases being moderated through regulatory
tariff adjustments, minimizing the impact on customer bills. Pennon
Water Services' revenue increased by GBP9.4 million, with new
contracts, predominantly outside South West Water's regions,
contributing c.GBP7 million to this increase.
Overall, underlying EBITDA has reduced 3.5% from GBP174.6
million to GBP168.5 million including the impact of higher power
costs of c.GBP7 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 GBP3.3
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 GBP0.5 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 GBP3.2
million (H1 2022/23 profit GBP20.9 million) after non-underlying
costs of GBP5.9 million (H1 2022/23 GBP1.6 million). Group
underlying profit before tax decreased to GBP9.1 million from
GBP22.5 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 GBP5.7 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 GBP377.8m GBP363.8m +3.8%
Power (GBP55.2m) (GBP48.7m) (13.3%)
Other operating Costs (GBP155.5m) (GBP142.5m) (9.1%)
EBITDA GBP167.1m GBP172.6m (3.2%)
Depreciation and amortisation (GBP79.6m) (GBP74.8m) (6.4%)
Operating profit GBP87.5m GBP97.8m (10.5%)
Net interest charge (GBP80.9m) (GBP78.6m) (2.9%)
Profit before tax GBP6.6m GBP19.2m (65.6%)
---------------------------------- ------------ ------------ -------
Non-underlying items before tax (GBP5.4m) - -
Profit before tax GBP1.2m GBP19.2m (93.8%)
Statutory and underlying revenue of GBP377.8 million for H1
2023/24 has increased by 3.8% compared with the prior period (H1
2022/23 GBP363.8 million). The revenue growth of GBP14.0 million
reflects inflationary tariff increases of GBP30.8 million which
have been moderated through the impact of regulatory adjustments of
GBP14.8 million, minimising the impact on customer bills, and a
small overall reduction in demand.
Underlying operating costs of GBP210.7 million increased by
GBP19.5 million (H1 2022/23 GBP191.2 million). Power costs were up
GBP6.5 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
GBP9.4 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.GBP3 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 GBP4.8 million compared
to the same period last year.
The net interest charge of GBP80.9 million is GBP2.3 million
higher than prior year (H1 2022/23 GBP78.6 million).
South West Water's capital expenditure was GBP234.4 million, an
increase of GBP91.9 million (64.5%) on the prior year (H1 2022/23
GBP142.5 million), due to our commitment to accelerate investment
across priority areas of water resources, water quality, pollution
reductions and storm overflows.
In drinking water, GBP150.2 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 GBP84.2 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 H1 2023/24 H1 2022/23 Change
and underlying
Revenue GBP117.6m GBP108.2m +8.7%
Water segment wholesale elimination (GBP46.7m) (GBP46.7m) -
Revenue excluding elimination GBP70.9m GBP61.5m +15.3%
Operating Costs [11] (GBP114.5m) (GBP105.9m) (8.1%)
Water segment wholesale elimination GBP46.7m GBP46.7m -
Operating costs excluding elimination (GBP67.8m) (GBP59.2m) (14.5%)
EBITDA GBP3.1m GBP2.3m +34.8%
Depreciation and amortisation (GBP0.3m) (GBP0.4m) +25.0%
Operating profit GBP2.8m GBP1.9m +47.4%
Net interest charge (GBP1.1m) (GBP0.8m) (37.5%)
Profit before tax GBP1.7m GBP1.1m +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
GBP7.3 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 GBP3.1 million (H1 2022/23 GBP2.3 million). This
strong performance has resulted in the business reporting a profit
before tax of GBP1.7 million (2022/23 GBP1.1 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.GBP2.8 million secured during the year.
Group net finance costs
Total net finance costs for the Group of GBP77.3 million are
GBP2.6 million higher than last year (H1 2022/23 GBP74.7 million).
The non-cash element of our finance charges, which accretes to the
debt principal, was c.GBP29 million (H1 2022/23 c.GBP39
million).
There were no non-underlying finance costs in H1 2023/24 or H1
2022/23 although a non-underlying gain of GBP18.4 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
GBP300 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 GBP300
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
GBP0.5 million of profit after tax from our associated company,
Water2business, in H1 2023/24 results (H1 2022/23: GBPnil).
Non-underlying items and acquisition accounting
Non-underlying items for H1 2023/24 total a charge before tax of
GBP5.9 million (H1 2022/23 charge of GBP1.6 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 GBP5.9 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.GBP17
million of costs (including customer incentives) to address the
severe drought conditions were recognised in H2 2022/23. In H1
2023/24, a further GBP1.8 million of specifically identifiable
costs have been incurred to address these specific issues.
-- GBP3.6 million of costs in connection with the business
transformation of South West Water following the merger of Bristol
Water into South West Water.
-- GBP0.5 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 GBP1.4 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 GBP1.4
million (H1 2022/23 charge of GBP2.4 million). On an underlying
basis, the net tax charge for H1 2023/24 for the Group of GBP2.8
million (H1 2022/23 charge of GBP2.7 million) consists of:
-- Current tax credit of GBP0.6 million, reflecting an effective
tax credit rate of (6.6%) (2022/23 charge of GBP1.5 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 GBP0.6m 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 GBP3.4 million (H1 2022/23 charge of
GBP1.2 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 GBP0.8 million in relation to interest
deductions.
There is also a non-underlying deferred tax credit of GBP1.4
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 GBP5.9 million and a net
non-underlying deferred tax credit of GBP1.4 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 GBP88.8 million (H1 2022/23 GBP160.2 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 GBP45.5 million (H1 2022/23 GBP93.3
million) with the comparative for H1 2022/23 including GBP51.5
million of interest paid on lease settlements relating to interest
accreted to the lease principal. As noted above, c.GBP29 million
(H1 2022/23 c.GBP39 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 GBP114.9
million to GBP270.3 million (H1 2022/23 GBP155.4 million). This
includes c.GBP23 million of cash outlay on our renewable
investments through Pennon Power, being c.GBP30 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 (GBP111.7
million) and GBP14.4 million of non-cash indexation on our loan
instruments. Other movements of GBP8.3 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 GBP3,326.8
million (31 March 2023 GBP2,965.4 million). This includes fair
value adjustments on acquired debt of GBP118.1 million ([12]) which
are released over the life of the related debt instruments. The
Group's net debt position excluding these adjustments is GBP3,208.7
million.
Efficient and responsible financing
Since 31 March 2023, the Group has secured c.GBP710 million of
new and renewed facilities, including:
-- Our first syndicated GBP300 million private placement with an average maturity of 12 years
-- GBP50 million of new term loans and leasing with an average maturity of 9 years
-- GBP100 million bilateral facility to support Group investments
-- GBP25 million 20 year Private placement
-- GBP235 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] gross debt at 30 September 2023 was
GBP3,149 million (31 March 2023 GBP2,918 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] 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
GBP544 million of cash and committed facilities as at 30 September
2023. This consists of cash and cash deposits of GBP94 million
(including GBP22 million of restricted funds representing deposits
with lessors against lease obligations) and GBP450 million of
undrawn facilities.
South West Water (13) net debt at 30 September 2023 is a mix of
fixed / swapped (GBP2,146 million, 69%), floating (GBP525 million,
17%) and index-linked borrowings (GBP420 million, 14%), which
reflects our diverse debt portfolio and compares to an industry
average [15] 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.GBP1 billion in new funding by March
2025 to meet K7 and new business opportunities through the
renewables business whilst also providing c.GBP300 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 GBP5.4 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.GBP2.5 billion through additional
opportunities in the private placement and public bond markets.
This overall funding requirement includes c.GBP700 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 GBP0.3 million compares to a surplus of GBP29.3
million at 31 March 2023.
The overall reduction of the surplus in H1 2023/24 of c.GBP29
million, which relates to the Group's principal pension scheme,
Pennon Group Pension Scheme (PGPS), reflects:
-- GBP15 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
-- GBP14 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.GBP7 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 GBP160 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.GBP30 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.GBP60 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.GBP85 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] 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.GBP10 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 GBP850 million, an
increase of GBP100 million on the guidance given at the time of our
FY 2022/23 results of over GBP750 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 GBP5.4 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.GBP125
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 GBP100 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] from 19% to c.13% [18] 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] 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.GBP145 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 GBP90
million [20] 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]) 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](, [23]) across the Group in H1
2023/24 has improved from 2022/23, we anticipate a net financial
penalty of c.GBP1.7million for South West Water, and a net
financial penalty of c.GBP0.8 million for Bristol Water.
Cumulative RORE outperformance equates to c.GBP190 [24] million
in K7 to date, reflecting c.GBP250 [25] million financing
outperformance, net of c.GBP20 million ODI penalty, and c.GBP40
[26] 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.GBP20 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]
South West Bristol Water South West Bristol Water
Water 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.GBP2.8 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 GBP2.8 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 GBP2.8 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
GBP200 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 GBP4.5
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.GBP5.4 billion, which includes c.GBP0.2 billion resulting from
additional totex planned in the current regulatory period ([28])
.
Over K8, we anticipate total RCV to increase to GBP7.4 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* GBP825.0m
* Inflation reflected in 2023/24 tariffs in South West
Water 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 GBP2,965.4m
* Continued delivery of accelerated environmental
capital investment across the Group
* Accretion on index-linked debt
-------------------------------------------------------------- ------------ -------
Current 16.1%
tax
* 2022/23 current tax effective credit rate reflects (credit
rate)
prior year credit as a result of additional
super-deductions and lower non-deductible expenditure
following the submission of the 2022 corporate tax
computations
* 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 GBP517.2m
costs* * Growth in retail businesses leading to higher
wholesale supply 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] .
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* GBP154.7m
* Expanded capital programme driving increases in
depreciation
-------------------------------------------------------------- ------------ -------
Net interest* GBP136.6m
* RPI swaps over K7 to smooth the impact of inflation
* Increased variable rates on floating rate debt -
c.65% of debt fixed
* Increased levels of debt to support capital
investment profile
-------------------------------------------------------------- ------------ -------
Capex GBP358.3m
* Capital expenditure reflects K7 existing profile of
investment along with additional and accelerated
environmental investment
-------------------------------------------------------------- ------------ -------
RORE * Expected year on year reduction in line with lower
(Underlying inflation expectations - continued expectation of a
Ofwat measure) doubling of cumulative base returns for the Group 10.5%
-------------------------------------------------------------- ------------ -------
RCV [30] GBP4.7bn
* Increase in line with K7 business plan levels of
investment in addition to additional and accelerated
investment, regulatory true-ups and inflationary
impact - shadow RCV for March 2024 forecast GBP5.1bn
-------------------------------------------------------------- ------------ -------
*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 Before
non-underlying items non-underlying Non-underlying
items (note Total items items
half 5) half half half (note Total
year year year year 5) half half
ended ended ended ended year ended year ended
30 September 30 September 30 September 30 September 30 September 30 September
2023 2023 2023 2022 2022 2022
Notes GBPm GBPm GBPm GBPm GBPm GBPm
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,
depreciation and
amortisation 4 168.5 (5.9) 162.6 174.6 (1.6) 173.0
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 Before
non-underlying Non-underlying non-underlying Non-underlying
items items Total items items
half (note half half (note Total
year 5) half year year 5) half half
ended year ended ended ended year ended year ended
30 September 30 September 30 September 30 September 30 September 30 September
2023 2023 2023 2022 2022 2022
GBPm GBPm GBPm GBPm GBPm GBPm
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
obligations (note 16) (28.6) - (28.6) (15.6) - (15.6)
Income tax on items
that will
not be reclassified 7.1 - 7.1 3.6 - 3.6
--------------- -------------- ------------- --------------- -------------- -------------
Total items that will
not be
reclassified to
profit or loss (21.5) - (21.5) (12.0) - (12.0)
--------------- -------------- ------------- --------------- -------------- -------------
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
subsequently to
profit or loss 14.4 - 14.4 48.5 - 48.5
--------------- -------------- ------------- --------------- -------------- -------------
Other comprehensive
(loss)
/ income for the
period
net of tax (7.1) - (7.1) 36.5 - 36.5
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 31 March
2023 2023
Notes GBPm GBPm
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 redemption Retained
capital account reserve earnings
(note (note (note and other Non-controlling Total
10) 11) 12) reserves interests equity
GBPm GBPm GBPm GBPm GBPm GBPm
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
payments (net of tax) - - - 0.8 - 0.8
Own shares acquired by the Pennon
Employee
Share Trust in respect of Share
options - - - (4.7) - (4.7)
Proceeds from shares issued under
the Sharesave Scheme 0.2 1.5 - - - 1.7
-------- -------- ----------- ---------- --------------- ---------
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 Capital
Share premium redemption Retained
capital account reserve earnings
(note (note (note and other Non-controlling Total
10) 11) 12) reserves interests equity
GBPm GBPm GBPm GBPm GBPm GBPm
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
payments (net of tax) - - - 0.2 - 0.2
Own shares acquired by the Pennon
Employee
Share Trust in respect of Share
options - - - (1.4) - (1.4)
Proceeds from shares issued under
the Sharesave Scheme - 0.1 - - - 0.1
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
2022
Half year
ended 30
September
2023 (restated*)
Notes GBPm GBPm
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 GBP300 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 GBP544 million, including cash and other short-term deposits
of GBP94 million and GBP450 million of undrawn facilities. Cash and other
short-term deposits include GBP22 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.GBP87m, 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 GBP51.5 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 GBP148.0 million to GBP96.5 million within the cash flows from financing
activities, and the "Interest paid" in the cash flows from operating activities
has been restated from GBP45.2 million to GBP96.7 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 Half year ended
30 September 30 September
2023 2022
Revenue GBPm GBPm
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 UK total
2022
Water Non-household Other Total
retail
GBPm GBPm GBPm GBPm
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 UK total
2023
Water Non-household Other Total
retail
GBPm GBPm GBPm GBPm
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 Half year ended
30 September 30 September
2023 2022
GBPm GBPm
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) GBP3.6 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. GBP10 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.GBP17 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 GBP1.8 million
of specifically identifiable costs have been incurred to address these
specific issues.
(3) GBP0.5 million of expenses in connection with the acquisition of four
renewable
power generation investments.
(4) The Group incurred expenses of GBP1.6 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 Finance Total Finance Finance Total
costs income costs income
GBPm GBPm GBPm GBPm GBPm GBPm
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 GBP4.1 million have been capitalised
on qualifying assets included in property, plant and equipment (H1 2022/23
GBP1.6 million).
7. Taxation
Unaudited
-------------------------------------------------------------------------------------------
Before
non-underlying Non-underlying Before Non-underlying
items items Total non-underlying items
half (note half items (note Total
year 5) half year half year 5) half half
ended year ended ended ended year ended year ended
30 September 30 September 30 September 30 September 30 September 30 September
2023 2023 2023 2022 2022 2022
GBPm GBPm GBPm GBPm GBPm GBPm
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 Half year ended
30 September 30 September
2023 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
Earnings per
Profit share Profit Earnings per share
after after
tax Basic Diluted tax Basic Diluted
GBPm p p GBPm 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
and deferred tax 9.3 3.6 3.6 20.8 7.9 7.8
----------------- ----------------- ------- ------------------ ----- -----------------
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
9. Dividends
Amounts recognised as distributions to ordinary Unaudited
equity holders in the period:
--------------------------------
Half year ended Half year ended
30 September 30 September
2023 2022
GBPm GBPm
Interim dividend paid for the year ended
31 March 2023: 12.96 pence (2022: 11.70 pence)
per share 33.9 31.5
Final dividend paid for the year ended
31 March 2023: 29.77 pence (2022: 26.83 pence)
per share 77.8 70.0
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 GBP111.7 million.
Unaudited
--------------------------------
Half year ended Half year ended
30 September 30 September
2023 2022
GBPm GBPm
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 GBPm
At 1 April 2022 ordinary shares of 61.05
pence each 5,628 264,841,320 161.7
For consideration of GBP1.7 million, shares
issued in
respect of the Company's Sharesave Scheme - 280,605 0.2
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 GBPm
At 1 April 2023 ordinary shares of 61.05
pence each 5,628 261,315,489 159.5
For consideration of GBP0.1 million, shares
issued in
respect of the Company's Sharesave Scheme - 17,606 -
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 GBP239.5 million.
The Group purchased GBP39.9 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 GBP2.4 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 GBPm
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 GBPm
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 Unaudited
to net
cash inflow from operations:
Half year ended Half year ended
30 September 30 September
2023 2022
GBPm GBPm
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 Half year ended
30 September 30 September
2023 2022
Total interest paid GBPm GBPm
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 GBP24.8 million (H1 2022/23 GBP5.0
million)
were received and a gain of GBPnil (H1 2022/23 GBPnil). 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 Year ended
30 September 31 March 2023
2023
GBPm GBPm
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 Year ended
30 September 31 March 2023
2023
GBPm GBPm
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 GBP21.7 million (31 March 2023 GBP21.7 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/ Net cash/
(borrowings) Transfer between (borrowings)
at 1 April Cash non-current Other non-cash at 30 September
2022 flows and current movements 2022
GBPm GBPm GBPm GBPm GBPm
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/ Net cash/
(borrowings) Transfer between (borrowings)
at 1 April Cash non-current Other non-cash at 30 September
2023 flows and current movements 2023
GBPm GBPm GBPm GBPm GBPm
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
GBPm GBPm GBPm GBPm
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 Year ended
30 September 31 March 2023
2023
GBPm GBPm
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 Fair value Present Fair value
value of of plan value of of plan
obligation assets Total obligation assets Total
GBPm GBPm GBPm GBPm GBPm GBPm
At beginning of period (719.5) 748.8 29.3 (985.9) 1,052.2 66.3
Amounts recognised in the
income statement (17.4) 17.0 (0.4) (27.5) 27.9 0.4
Remeasurements through
other
comprehensive income 43.5 (72.1) (28.6) 249.8 (288.8) (39.0)
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.GBP7 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 Year ended
30 September 31 March 2023
2023
GBPm GBPm
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 GBP26.1m 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 GBP26.1m 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 Year ended
30 September 31 March 2023
2023
GBPm GBPm
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 Year ended
30 September 31 March 2023
2023
GBPm GBPm
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 Half year ended
30 September 30 September
2023 2022
GBPm GBPm
Sales to Water 2 Business 9.6 8.9
Purchases from BWBSL 2.0 1.4
--------------- -------------------
Balances with joint ventures Unaudited
Half year ended Year ended
30 September 31 March 2023
2023
GBPm GBPm
Trade and other receivables
Water 2 Business (including loan receivable of
GBP9.0m, 2022: GBP9.6m) 10.6 10.8
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
INDEPENT 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 Underlying Restructuring Drought Renewables Statutory Earnings
earnings / acquisition results per share
reconciliation transformation
30 September 2023 costs
GBPm GBPm GBPm 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 Bristol
30 September 2022 integration Statutory Earnings
Underlying costs results per share
GBPm GBPm GBPm 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
GBPm GBPm
Net finance costs before non-underlying items (note 6) 77.3 74.7
Remove: net finance income before non-underlying items
not associated with South West Water Limited's group of
companies 3.6 3.4
------- --------
Net finance costs before non-underlying items associated
with South West Water Limited's group of companies 80.9 78.1
------- --------
Net interest on retirement benefit obligations associated
with South West Water Limited's group of companies 0.7 1.0
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 of companies (100.1) 27.6
------- --------
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 of companies (235.4) (69.8)
------- --------
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
GBPm GBPm
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
GBPm GBPm
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
GBPm GBPm
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
GBPm GBPm
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.
(^) 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] Dividend policy of CPIH + 2%. The CPIH rate used is 6.3% as
of 30 September 2023.
[3] RCV growth over K7 forecast to be 60%, and RCV growth over
K8 forecast to be c.40%
[4] Total H1 2023/24 capital expenditure - GBP266.3 million,
including GBP31.7 million - Pennon Power
[5] 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] Total reservoir storage for Devon and Cornwall - 64% as at
30 September 2023 v 31% as at 30 September 2022
[7] Return on regulated equity calculated on Ofwat basis,
excluding re-investment in additional commitments
[8] 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] RCV growth over K7 forecast to be c.60%, and RCV growth over
K8 forecast to be c.40%
[10] Pennon Water Services: 80:20 joint venture with South
Staffs, water2business: 30% share of a joint venture with Wessex
Water.
[11] Includes wholesale costs for non-household customers.
[12] Carrying value of fair value acquisition adjustments to net
debt as at 30 September 2023 - GBP34.6 million Bournemouth Water,
GBP83.5 million Bristol Water.
[13] Based on South West Water Limited's group of companies,
including Bristol Water plc
[14] Based on South West Water net debt and shadow RCV
[15] UK water position as at 31 March 2022 as per published
Annual Performance Reports - weighted average.
[16] Based on current market pricing and current hedged position
of c.95% for 2023/24 and c.45% for 2024/25.
[17] Rivers not achieving good ecological status
[18] Based on Environment Agency August 2022 data publication
.
[19] From 130,000 tonnes (2021) to 80,000 tonnes (2023).
[20] Includes c.GBP40m WaterShare+, c.GBP10m Stop The Drop,
c.GBP40m customer support unlocked.
[21] ODIs on track or within regulatory tolerances.
[22] 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] H1 2023/24 reflects 50% of full year assumptions
[24] This is made up of c.GBP(40) million Totex^, c.GBP250
million financing, net of c.GBP20 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] Calculated post the impact of embedded cost of debt
(voluntary) sharing mechanism (WaterShare+)
[26] Calculated post the impact of regulatory totex sharing
mechanism
[27] 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] Including: additional amounts allocated for water
resilience (c.GBP125 million), WaterFit investments (c.GBP45
million) in addition to c.GBP40 million reflecting the underlying
totex position compared to the final determination. This underlying
c.GBP40 million is used in our RORE metrics presented in this
document to best reflect the true position compared to the original
determination.
[29] Based on current market pricing and current hedged position
of c.95% for 2023/24
[30] 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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END
IR UWAOROVUAUUA
(END) Dow Jones Newswires
November 29, 2023 02:00 ET (07:00 GMT)
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