Pennon Group PLC – Full Year Results 2017/18

Chris Loughlin, Pennon Chief Executive said:

 “Pennon has delivered a strong performance this year across water and waste. As a British business providing vital services to our communities, we are committed to delivering for customers and shareholders. Thanks to ongoing cost savings at South West Water, average bills are lower today than they were nine years ago, while we continue to invest significantly in our treatment plants and distribution network. Since 2015 our unique WaterShare policy has identified £79m of financial performance benefits to share with customers and we have been delighted by the response to our customer engagement campaign 'Get Into Water', which sets out our plans for ever improving service and increasing investment in the next regulatory period 2020-2025.

At Viridor the operating fleet of Energy Recovery Facilities is performing well, transforming household waste into electricity and heat. Good progress is being made to bring Viridor's remaining four Energy Recovery Facilities in the portfolio on stream, with three in commissioning and the final facility under construction. The expansion of Viridor's portfolio will support Pennon's earnings growth to 2020 and beyond. Viridor has looked to navigate a challenging recycling market in 2017/18 through self-help measures and a programme of innovation. That said, the UK recycling system needs fixing. We are encouraged that the 'Blue Planet' effect is spurring action and we are optimistic that positive changes will be announced in the Resources & Waste Strategy later this year creating a UK recycling system fit for the future.”

Financial Highlights

Pennon Group

·   The Group has performed well in 2017/18, in line with management expectations

·   Underlying PBT up +3.5% driven by:

o  South West Water:

−    Higher revenues reflecting net tariff increases and customer demand

−    Sector-leading cost savings on capital and operational expenditure (TOTEX)

o  Viridor:

−    ERF earnings growth, availability of operational ERFs

o  Pennon Group:

−    efficiencies of c.£13 million p.a. secured, c.£17 million p.a. expected from 2019

·   Growing cash inflow from operations reflecting robust operational performance, while significant investment continues

·   Sustainable, effective funding position underpinning continuing capital investment

o  Hybrid refinanced, Perpetual Capital Securities issue delivering balance sheet flexibility

o  Capital investment peaked in 2017/18 reflecting spending on ERFs

·   Statutory earnings per share growth of +20.6% to 48.0p

·   10 year sector-leading dividend policy to 2020, +4% growth above RPI Inflation every year

o  2017/18 dividend per share +7.3% to 38.59p

·   Positive outlook across water and waste – Pennon delivering sustainable long-term returns

South West Water

·   Continued strong performance at South West Water, customers at the heart of our business

o  Maintaining momentum – cumulative Return on Regulated Equity (RORE) at 11.8%[7]

o  Achieved accreditation of Institute of Customer Service 'Service Mark' in April 2018

·   On track to deliver all our business plan commitments by 2020, since 2015 cumulative performance delivered

o  TOTEX outperformance of £177 million, customers benefit from lower bills

o  Net ODI reward of £8.1 million

·   South West Water 'WaterShare' mechanism, £79 million of benefits from outperformance achieved

·   Licence expansion to cover Isles of Scilly (IoS) – investing in vital services, delivering growth

·   Development of plan for 2020-2025 (PR19) on track – largest ever customer engagement campaign 'Get into Water'

·   Bournemouth Water integration – £16 million of cumulative synergies already delivered with c.£27 million of cumulative synergies targeted by 2020

Viridor

·   ERFs performing well with operational ERFs delivering in excess of base case expectations, average availability of 92%[8]

·   Recycling market has been challenging, with operational costs increasing to meet quality requirements and the impact of China's new import policy (c.£3 million in 2017/18). Self-help measures are focusing on asset and contract optimisation, innovation and accessing new markets.  This has contributed to an increase in average revenue per tonne

·   UK Government policy changes in recycling expected later this year in Resources & Waste Strategy, Viridor optimistic that positive changes will be announced

·   Long-term partnership with Greater Manchester Waste Disposal Authority continues – positive outcome reached

·   Securing further ERF growth to support earnings

o  Three ERFs in commissioning (Glasgow, Beddington and Dunbar)

o  One ERF in construction (Avonmouth):

–     Progress on schedule and budget, piling for ERF building completed, bunker construction well underway and process steelwork being erected

·   Glasgow – Viridor is contractually entitled to recover incremental costs from the original principal contractor, Interserve, under certain circumstances, £69 million receivable recognised at year end 

Pennon Water Services

·   Pennon Water Services in net growth, notable contract wins – Moto, BMI Healthcare, Unite and Kerry Foods