Owners of South West Water and Bristol Water Pennon Group have reported a rise in profits and resilient operational and financial performance with the publication this morning of its results for the first half of 2021/22.

Pennon said the results are in line with management expectations – financial performance highlights include:

• +21.8% underlying revenue, with Bristol Water contributing £41.6 million
• +8.8% organic underlying revenue primarily due to a recovery in non-household demand both in and out of region and contributing contract wins from Pennon Water Services
• +14.3% underlying EBITDA growth with contribution from Bristol Water from 3 June 2021
• +29.1% increase in profit before tax
• +4.3% increase in underlying profit before tax
• +14.2% increase in adjusted earnings per share (adjusted for share consolidation)
• Sector-leading dividend growth of 4.9% with dividend per share up (CPIH +2%) to 11.70 pence

The Group has recorded a loss per share of 6.3 pence in H1 2021/22. Pennon said this reflects non-underlying deferred tax of £96.9 million and non-underlying acquisition costs relating to Bristol Water of £10.5 million. The reported loss per share compares to earnings per share of 420.9 pence in H1 2020/21 which included the significant profit on disposal of Viridor of c.£1.7 billion.

Group underlying profit before tax increased by 4.3% to £90.4 million compared with the prior year of £86.7 million. 

Underlying operating costs of £119.8 million increased by £13.0 million compared to £106.8 million in H1 2020/21. Pennon said the increase principally reflects:

• Increased production volumes arising from the recovery of non-household demand driving increased power and chemical consumption of c.£2 million
• Additional operating costs of c.£2 million to enhance and accelerate key areas of operational focus of pollutions and leakage

Underlying revenue at South West Water up 5.4% at £298.1 million 

Underlying revenue at South West Water for the first half (H1) 2021/22 of £298.1 million has increased by 5.4% (£15.2 million) compared with last year (H1 2020/21 £282.9 million). The increase reflects the recovery of the non-household market and developer services activity which were adversely impacted by Covid-19 in the prior period.

South West Water’s capital expenditure for H1 2021/22 was £98.7 million, compared to £73.3 million in H1 2020/21, reflecting the profile of the AMP7 business plan and further advancement of expenditure in both water and wastewater operations, offset by efficient delivery of schemes in conjunction with key partners.

Drinking water capital expenditure of £50.3 million included the commencement of Alderney water treatment works in Bournemouth, building a state-of-the-art facility following on from the successful construction of the Mayflower water treatment works in Plymouth. Pennon said the company will again deploy cutting-edge treatment processes, designed to produce high quality drinking water and to be more sustainable than a traditional water treatment works.

Wastewater capital expenditure of £48.4 million included continued advancement of pollutions related investments and bathing water improvements.

Pennon said South West Water had delivered a step-change in performance with around 40% reduction in internal and 20% reduction in external flooding - both are ahead of target.

The company has also seen a 40% improvement in sewer collapses, four years ahead of its 2025 target, attributed to using automated sewer conditioning surveys and AI to proactively detect faults on the network.

Sustainable step change in wastewater pollutions performance - “there remains much more to do”

Pennon is looking to achieve a sustainable step change in wastewater pollutions, launching its Pollutions Incident Recovery Plan in 2020 following what it described as “a disappointingly high level of pollutions.”

The Group has made a significant step change in performance, more than halving the number of pollutions compared to the same ten month period last year, using technology to predict potential events.

The reduction stems from a range of aspects in the Pollutions Incident Reduction Plan, including enhanced data modelling supported by root cause analysis. Innovative Meniscus technology is being used to model asset data in conjunction with per 10,000km weather forecasts to predict potential pollution risks, and at identified high-risk areas, Pennon is advancing asset-specific plans.

However, Pennon said this pace of improvement needs to be sustained in order to meet its 2025 targets and acknowledged that “there remains much more to do.”

The company has also achieved 100% water quality standards at its bathing beaches – its best ever performance.

Other operational highlights include:

• c.5,000 hectares of land within  catchments improved during H1 2021/22, ahead of AMP7 target
• c.30% reduction in mains repairs focusing on the resilience of the network
• Supply interruptions and unplanned outages ahead of target, maintaining best ever performance and achieving 2025 target four years ahead of schedule
• Leakage reduction plan on track, using innovative technology to identify leaks resulting in increased repair
• c.85% of Outcome Delivery Incentives (ODIs) on track or ahead of target H1 2021/22 - an increase from c.80% in FY 2020/21.
• ongoing deployment of EZ valves (the first company to use the new technology to repair bursts under pressure) – the technology has helped to improve the resilience of the network resulting in a c.30% reduction in mains repairs per 1,000km.

Reporting on Bristol Water, which Pennon Group acquired in June this year for £425 million, the report says financial performance was ahead of expectations, contributing £7.2 million in profit and capital investment of £12.7 million.

Commenting on Pennon Water Services, the Group’s retail business sector arm, Pennon said the company had continued its focus on securing sustainable business in the non-household market, securing around £9 million of contracts in H1 2021/22. Demand is now recovering near to pre-Covid-19 levels and cash collections remain robust.

Renewable energy generation investment opportunities of c.£60 million identified over the period to 2030

Pennon said that to offset operational and supply chain cost pressures, it was continuing to target efficiencies across the business. On energy use, 100% of its expected power usage for FY 2021/22 has been de-risked through hedging and via its own generation generation, while c.50% of its expected power usage beyond H1 2021/22 through to the end of AMP7 has been de-risked through hedging and increasing its own generation capacity. Around 10% of the Group’s underlying operating costs are linked to wholesale power costs.

According to Pennon, its energy risk policies involve constant monitoring of forward power prices and it will continue to manage its exposure to pricing volatility in this area.

As part of its target to achieve net zero carbon emissions by 2030, Pennon has identified renewable energy generation investment opportunities of c.£60 million over the period to 2030, in addition to c.£20 million associated with projects within the envelope of regulatory allowances.

Pennon said the investments would help to decrease its reliance on wholesale power markets – but that the current inflationary environment is expected to result in “increased operational and finance costs in 2021/22.” However, the impacts of the costs are expected to be outweighed by the increase in Regulated Capital Value (RCV) driving revenue in future years.

Leakage

Pennon launched its Leakage Reduction Plan in late 2020, which has already begun to deliver sustained improvements in performance. The improvement reflects the continued focus on optimising pressure management with new control valves and improved network modelling and through working collaboratively with partners, increasing detection and repair activity.

Satellite scanning and fixed acoustic loggers are continuing to enhance leak detection capability and pin-point leaks more precisely, reducing dig and repair costs. Increased use of more agile acoustic logging enables greater flexibility and deployment in greater numbers for targeted locations of focus.

Bristol Water – reinvesting in UK water

Pennon describes its acquisition of Bristol Water as “a strong strategic fit for the Group”, with financial performance since acquisition ahead of expectations. The Competition & Markets Authority (CMA) unconditionally cleared the non-household aspect of the acquisition earlier in November.

While the CMA review is ongoing, Bristol Water and South West Water will continue to be operated independently of each other - an update is expected in late December on the ongoing water merger review.

Pennon said the £425 million acquisition of Bristol represents 16% RCV growth, with synergistic benefits expected to deliver further growth based on Pennon’s previous track record. Alongside this, Bristol’s Final Determination reflects growth of 9.3% to 2025. With one in 16 households in the region now shareholders, Pennon is planning a second WaterShare+ issuance in 2022, linked to its acquisition of Bristol Water.

“We continue to pursue a relentless approach to improving operational performance ..and keeping customer bills as low as possible"

Susan Davy, Group Chief Executive, commented:

“We are reporting resilient performance across the group, we continue to build momentum, driving sustainable growth, and ensuring we are well positioned to help tackle climate change. This, together with an evolving environmental strategy, will deliver the step change we all want to see for the health of our region now and for generations to come.

“We continue to pursue a relentless approach to improving operational performance through innovative solutions that drive efficiency, and in turn keeping customer bills as low as possible, at a time when customers need supporting most.

“Our sector leading dividend policy recognises the ongoing loyalty of our shareholders, many of whom are customers, charities, employees and pensioners in the UK, underpinned by the Group’s confidence in our ongoing growth strategy, and building a sustainable future for all.”

Neil Shah, Executive Director at leading investment research and consultancy firm Edison Group said Pennon Group’s strong financial performance leaves it "well placed to navigate ongoing economic uncertainties.”