Half Year Results 2022/23

30 Nov 2022

Bringing water to life
Building momentum, driving sustainable growth

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
    • 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
    • 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
    • Pollution Incident Reduction Plan activities accelerated to deliver maximum environmental benefit
    • Roll out of c.9,000 sewer depth monitors underway across the network
    • 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 million2 in H1 2022/23 across our asset base to support the delivery of our environmental, water and wastewater service outcomes
    • c.80% of Outcome Delivery Incentives^ (ODIs) on track or ahead of target for South West Water
    • 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
    • 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
    • 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 Water5

Dividend policy underpinned by continued RORE outperformance

  • Growth of 10.8%6 reflecting established policy of CPIH + 2%.

Driving sustainable growth

FINANCIAL PERFORMANCE

 

H1 2022/23

H1 2022/23 (restated7)

Change

Underlying revenue^

£425.5m

£389.3m

+9.3%

Non-underlying items before tax7

£22.5m

£90.4m

(75.1%)

Non-underlying items before tax7

(£1.6m)

(£10.5m)

 

Profit before tax

£20.9m

£79.9m

(73.8%)

Group RORE8

£13.4m

£9.3m

+4.1%

Earnings per share

 

 

 

  • Adjusted EPS^

7.9p

30.6p

(74.2%)

  • Statutory EPS

7.0p

(6.3p)

+211.1%

Interim dividend per share6 - 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 Services9, 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.

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 09:15am (GMT). Details are included below:

United Kingdom (Toll Free)

0800 640 6441

United Kingdom (Local):

020 3936 2999

All other locations:

+44 203 936 2999

Conference code

282380

For further information, please contact:

Paul Boote - Group Chief Financial Officer
Jennifer Cooke - Head of Investor Relations 01392 443 168

James Murgatroyd - FGS Global
Harry Worthington 020 7251 3801

1Based on our preliminary analysis of Environment Agency data ahead of the Environment Agency's formal publication of results
2Water business capital expenditure excludes c.£0.1 million other investment
3Group ROREfor H1 2022/23
4Calculated using forecast RCV for 31 March 2023 and water business net debt as at 30 September 2022
5Bristol Water contributing c.19% RCV growth from acquisition to 2025
6Dividend policy of CPIH + 2%. The CPIH rate used is 8.8% as of 30 September 2022.
7Non-underlying items are adjusted for by virtue of their size, nature or incidence to enable a full understanding of financial performance
8Ofwat RORE -H1 2022/23 Group RORE, calculated on Ofwat basis