30 November 2022
Half Year Results 2022/23
Susan Davy, Group Chief Executive, commented:
I’m pleased to report a resilient half year performance for Pennon. We’re delivering robust fundamentals, executing our strategy and driving long-term sustainable growth.
In the first half of this year we’ve delivered record levels of investment to support a step change in environmental performance and build resilience for the longer term, having experienced the hottest, driest year since records began. Today we are announcing a further increase in investment in water resilience schemes of c.£45 million to repurpose ex-quarries and mines and introduce de-salination units to ensure our resilience to 2050 is in place now. Together with the investment announced earlier this month, this brings the total reinvestment in these initiatives to c.£75 million. Underpinning our investment is our sector-leading financial outperformance and strong balance sheet.
Our investments aren’t just in places and infrastructure, they’re in people and communities too. Given the current cost of living crisis, at Pennon, we believe every customer should benefit from what we do.
We are delivering over £78 million of benefits to customers, at a time when customers need it most; including our commitment to share the benefits of financial outperformance with customers through a second issuance of our unique Watershare plus scheme, with £40 million funded so far to give customers the option of a stake and a say in their water company, or money off their bill.
We are also announcing plans to double our apprenticeship and graduate schemes to 2030, and will offer 5,000 work placements to school children over the same period, supporting those in our region to live local and prosper.
ROBUST FUNDAMENTALS, DRIVING LONG-TERM SUSTAINABLE GROWTH
Improving environmental performance
· 100%[1] bathing water quality for the second consecutive year with 99% achieving good or excellent status
o 9 bathing water investments completed in K7 to date to support water quality improvements
· c.50% reduction in storm overflow use during the bathing water season, supported by our WaterFit investments
o On track to reduce releases from storm overflows to an average of 20 per year, per storm overflow by 2025, investing c.£20 million in additional storm storage at 58 sites across our network
· On track to reduce our impact on river water quality by one third by 2025 – extensive enhancement across the network including sewer separation at 9 sites, and progressing our bathing water pilots on the rivers Dart and Tavy
· Delivering continued reductions in wastewater pollution incidents – best performance in 10 years – on track in 2022 for continued reduction
o Pollution Incident Reduction Plan activities accelerated to deliver maximum environmental benefit
o Roll out of c.9,000 sewer depth monitors underway across the network
o Focused on predictive modelling of pollution risks enabling early intervention
· Net Zero 2030 on track – supported by capturing carbon through peatland restoration, increasing our electric fleet and investing in renewable energy generation to support 50% self-generation ahead of 2030
Record c.30% increase in capital investment
· Investment of £142.5 million[2] in H1 2022/23 across our asset base to support the delivery of our environmental, water and wastewater service outcomes
o c.80% of Outcome Delivery Incentives^ (ODIs) on track or ahead of target for South West Water
o c.75% of Outcome Delivery Incentives on track or ahead of target for Bristol Water
· c.95% of our capital programme under framework contracts
Supporting our customers
· Over 100,000 customers across our region benefiting from our affordability initiatives
o c.12% increase in customers benefiting from our social tariff – targeting to double the number of customers benefiting by 2025
· c.£78 million of customer benefits announced to date in K7
· Second £20 million issuance of our unique customer sharing mechanism – WaterShare+, with Bristol Water customers also benefiting for the first time
· Keeping bills as low as possible – bill reduction in 2022/23 for South West Water, and significantly below inflation for 2023/24 across the Group
Innovating to deliver – water resources
· Investing c.£75 million to secure future resilience including re-purposing old quarries and mines and progressing de-salination
· Pioneering ‘Stop the Drop’ initiative launched – customers financially incentivised to reduce demand and support reservoir recovery
Double digit returns
· Sector-leading double-digit Return on Regulated Equity^ (RORE) – 13.4%[3]
o Strong financing outperformance – strategic positioning enables the Group to continue to outperform in current macro-economic environment
· Cumulative K7 outperformance of c.£225 million enabling reinvestment in environmental and customer initiatives, including WaterFit, Green Recovery, WaterShare+ and additional accelerated water resilience investment
· Continuing to anticipate cumulative doubling of base returns over K7
Financial resilience
· Sustainable gearing – 58.4%[4], below Ofwat’s notional gearing of 60%
· Responsible employer – pension scheme in surplus
· Headroom for investment of c.£500 million
Long-term growth – disciplined capital allocation
· Sustainable, profitable B2B retailer growth
· c.£160 million earmarked for investment in renewable energy generation
· Delivering on our twin track organic and acquisitive growth strategy, supported by Pennon’s strong balance sheet capacity and agility
· Sector-leading Regulatory Capital Value (RCV) growth – c.50% over K7, benefiting from our acquisition of Bristol Water[5]
Dividend policy underpinned by continued RORE outperformance
· Growth of 10.8%[6] reflecting established policy of CPIH + 2%.
FINANCIAL PERFORMANCE
| H1 2022/23 | H1 2021/22 | Change | |
| Underlying revenue^ | £425.5m | £389.3m | +9.3% |
| Underlying profit before tax^ | £22.5m | £90.4m | (75.1%) |
| Non-underlying items before tax[7] | (£1.6m) | (£10.5m) | – |
| Profit before tax | £20.9m | £79.9m | (73.8%) |
| Group RORE[8] | 13.4% | 9.3% | +4.1% |
| Earnings per share | |||
| · Adjusted EPS^ | 7.9p | 30.6p | (74.2%) |
| · Statutory EPS | 7.0p | (6.3p) | +211.1% |
| Interim dividend per share 6 – dividend policy | 12.96p | 11.70p | +10.8% |
· Underlying revenue up primarily due to growth in non-household demand both in and out of region, contract wins from Pennon Water Services[9], and a full six-month contribution from Bristol Water
· Underlying profit before tax – reduction reflecting the near-term pressures on earnings from inflation driven power pricing and financing costs, net of other cost efficiencies, as flagged
· Profit before tax of £20.9 million, down from £79.9 million in H1 2021/22
· Adjusted earnings per share of 7.9 pence, down from 30.6 pence
· Statutory earnings per share of 7.0 pence includes non-underlying items. Statutory earnings per share for H1 2021/22 were impacted by the significant non-underlying deferred tax charge in respect of the change in corporation tax rate
· Group RORE for H1 2022/23 of 13.4% reflecting an increase of 4.1% on H1 2021/22
· Sector-leading dividend growth with interim dividend per share up 10.8% (CPIH +2%) to 12.96 pence.
A full reconciliation to the statutory reported results is included in item (i) in the Alternative Performance Measures on pages 63 to 66 of this announcement.
OUTLOOK
Underpinning the Group is our strategically positioned, robust balance sheet, delivered through being disciplined with our financial investment and approach through the long term. This has enabled us to absorb the impact of elevated inflation on power and interest costs in this half, deliver record investment, and ensure that the pension scheme continues to be in surplus, whilst simultaneously reducing gearing at the water business to 58.4% and ensuring there is headroom capacity for growth of c.£500 million.
Robust financial and operational outcomes underpin our sector-leading RORE, with a Group RORE at H1 2022/23 of 13.4%. Outperformance delivered to date in K7 of c.£225 million is enabling reinvestment in this period – including our Green Recovery, WaterFit, additional water resources investments and our second WaterShare+ issuance.
Our underlying performance across all Environmental Performance Assessment (EPA) metrics is improving, however, with ratcheting targets we do not anticipate a change in the EPA metric for 2022. We remain on a trajectory that would result in achieving our target of 4* status for 2024.
To date in K7 we have announced c.£78 million of customer support. We continue to work hard to deliver quality services at an efficient cost, so that bills remain as low as possible. Over 100,000 customers are currently benefiting from our broad range of affordability initiatives – including delivering a c.12% increase in those benefiting from our social tariffs, which we are targeting to double by 2025.
Our B2B businesses[10], PWS and water2business continue to win contracts, driving strong financial performance and profits. With a combined market share of c.12% have some of the lowest customer attrition rates in the market, and excellent customer service scores as measured by TrustPilot.
The water business RCV is set to grow by a sector-leading c.50% over K7, with our two B2B retailers profitably growing in a competitive market and c.£160 million held for investment in value enhancing renewable energy generation projects across the UK, decreasing our reliance on volatile global power markets. Looking to K8 and beyond, we see the need for significant investment which will drive RCV growth as we deliver extensive environmental and resilience driven schemes.
Through the successful execution of our twin track strategy – driving both organic and acquisitive opportunities, underpinned by our disciplined capital allocation, we will continue to create long-term sustainable value.
Post our acquisition of Bristol Water in 2021 we are on track to integrate our water businesses, bringing together the best of the best to improve services for customers across the Group. The Licence change and Statutory Transfer is anticipated in early 2023 and we are deploying our integration blueprint ahead of that.
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.
The Group’s dividend policy to 2025 of CPIH +2% delivers an interim dividend of 12.96 pence per share.
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 08:30am (GMT), today, 30 November 2022 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 09:00am (GMT):
| United Kingdom: | 0800 640 6441 |
| United Kingdom (Local): | 020 3936 2999 |
| All other locations: | + 44 20 3936 2999 |
| Conference passcode: | 282380 |
For further information, please contact:
| Paul Boote | Group Chief Financial Officer | 01392 443 168 |
| Jennifer Cooke | Head of Investor Relations | |
| James Murgatroyd | FGS Global | 020 7251 3801 |
| Harry Worthington |