Pennon Group resilient operational and financial performance in H1 2020/21

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Pennon Group PLC (LON:PNN) has announced its half year results 2020/21 for the period ended 30 September 2020.

Susan Davy, Pennon Chief Executive, commented:
“I am delighted to be leading the business at this important time in Pennon’s history. The completion of the Viridor sale in July this year has seen significant shareholder value realised, allowing us to refocus our business on excellence in the water and wastewater sector. It is an incredibly exciting time for the Group as we forge ahead with our ‘New Deal’ plans for the K7 2020-25 period.
We will deliver our New Deal by being even closer to the people we serve, understanding people’s needs, demonstrating the positive impacts we’re making, and above all else, doing the right thing. We are promoting social mobility, addressing racial and gender inequality, and providing secure jobs across our regions.
This starts with our new WaterShare+ scheme, in which one in 16 of our household customers are now shareholders in the business helping us to create a new kind of water company, closer to the customers and communities we serve. Environmental considerations continue to be at the heart of our decision making, and we are focused on delivering on our commitments.
Pennon has delivered resilient operational and financial performance through the first half of 2020/21, making good progress in the new K7 regulatory period and against the backdrop of COVID-19. I’d like to recognise the exceptional commitment and resilience of all our people during this time. Since taking on the role of CEO I have spent time out and about on our sites and have been humbled by their dedication and professionalism that has allowed us to continue to deliver for customers, communities and the environment.”

Reshaping the Group

· Successful sale of Viridor

o £1.7 billion profit on disposal following sale of Viridor: £3.7 billion net cash proceeds received

o Debt rightsizing progressing well with c.£0.75 billion repaid to date

o £36 million contribution to Pennon’s principal pension scheme

o £2.7 billion headroom for investment

· Focused on UK Water

o Sector leading dividend policy – growth of CPIH +2%, underpinned by our sustainable strategy with expectations for continued outperformance

A new deal for K7 – changing the nature of our relationship with customers, communities and people

· Driving operational excellence for customers in H1 2020/21

o Continued improvements in key customer measures with period on period reductions in supply interruptions (down 51%), improvements to water quality (taste and odour complaints down 18%) and written complaints (down 5%)

o Maintaining excellent bathing water quality – 99.3% meeting the quality standard

o Catchment and biodiversity gains through improvements on 14,000 hectares of land

o Delivering against our commitments for K7 with 80% already on target or in reward. Key focus on improving pollutions performance.

· Nurturing talent with 500 apprenticeships planned over the next 5 years and we are an early adopter of the Government’s Kickstart scheme

· Creating a diverse and inclusive place to thrive. We are in the top quartile for the Hampton Alexander review, our gender pay gap is significantly below the national average and have become a signatory to Change the Race:Ratio taking action to increase racial and ethnic participation in our business

· Delivered our ground breaking innovative WaterShare+ scheme giving customers a stake and a say

o c.£20 million of outperformance from 2015-20 shared with customers through unique WaterShare+ scheme

o One in 16 household customers opted to receive shares, more than tripling the number of Pennon shareholders, demonstrating significant customer ownership for a listed company

Financial and operational performance throughout COVID-19 remains robust

· Resilient COVID-19 operations – limited financial impact

· Cash collections for South West Water and Pennon Water Services remain robust

· No requirement for the use of regulatory or market support mechanisms

· 21,000 additional customers added to South West Water’s dedicated COVID-19 priority services register

Resilient financial results following K7 revenue reset

· Results in line with management expectations

· WaterShare RORE of c.8.0% driven by strong totex^ and financing outperformance

o £34 million totex efficiency delivered to date, maintaining momentum over K7

o 2.5% average effective interest rate^, significantly below Ofwat’s 4.2% notional cost of debt

· £86.7 million Continuing Group underlying profit before tax^ (H1 2019/20 £101.4 million)

· 17.9p underlying earnings per share^ for the Continuing Group (H1 2019/20 20.1p²)

PENNON BUSINESS REVIEW

Continuing to deliver for our customers and communities through the ongoing COVID-19 pandemic

The COVID-19 pandemic has presented the water industry with an unprecedented test of what it means to be sustainable and resilient. With our responsibility for critical infrastructure providing essential services to customers and communities, maintaining our focus on delivering outstanding services, safely, has never been so important. We are proud that our ongoing commitment to do the right thing, in the right way, has continued to deliver sustainable results.

We rapidly adapted to the operational and financial challenges presented by COVID-19 and we are well placed to weather the ongoing situation arising from the global pandemic. Our focus remains on delivering for all stakeholders and making a positive contribution in the communities we serve. We will continue to identify and support those who are most in need of help.

In order to meet our commitments, we are advancing expenditure including delivering two bathing water quality improvements and earlier than planned upgrades in our network to reduce leakage.

Reshaping the Group – focused on UK water

2020 has been a landmark year for Pennon Group. On 8 July we completed the sale of Viridor to KKR for an enterprise value of £4.2 billion, with net cash proceeds of £3.7 billion received. The sale recognised the strategic value developed over many years, realising significant value for Pennon shareholders.

Following the disposal, we committed to right-sizing our debt portfolio at the Pennon company level, which is well underway with c.£0.75 billion repaid to date, and we have also contributed an additional £36.0 million to Pennon’s principal pension scheme.

The Group is now focused on its sector leading water and wastewater businesses, with our environmental, social and governance (ESG) commitments at the heart of all we do.

Creating value for shareholders and customers

We believe there is significant value potential for shareholders from the reinvestment of the Viridor sale proceeds in the UK water sector. The Group has significant funds available of £2.7 billion and we are working extensively to narrow down the potential opportunities. At this stage we are continuing to assess whether any opportunities are executable and can deliver attractive financial returns.

As we demonstrated with our acquisition of Bournemouth Water in 2015, value from any potential opportunity would be driven by our ability to deliver totex outperformance, financial efficiencies, synergies and growth.

The Board’s highly disciplined approach to assessing all opportunities considers a range of factors including earnings accretion, value creation from the impact on shareholder returns (both income and growth), and the impact on customers and other stakeholders.

All opportunities are benchmarked against a return of capital to shareholders. If a compelling value creating opportunity is not available, capital will be returned to shareholders.

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Our vision and purpose

The changing shape and leadership of the Group presented an appropriate point at which to refresh our vision and purpose. Our new vision and purpose demonstrate our ongoing focus on the UK water sector, and reflects our deep understanding that water forms the lifeblood of communities.

Our vision is ‘Bringing water to life’ and our purpose is ‘Supporting the lives of people and the places they love for generations to come’.

Our vision and purpose guide us in every aspect of our operation, ensuring that we are focused on making a positive impact by doing the right things, in the right way, and ultimately delivering for our customers, the environment and shareholders.

Living our core values, operating in the public interest

We understand that water companies play a unique role in providing a vital service for the public good. Our core values have been embedded within our organisation over many years and underpin our everyday operations from how we work with each other to how we deliver exceptional results for all stakeholders:

· Trusted – we do the right thing for our customers and stakeholders

· Responsible – we keep our promises to our customers, communities and each other

· Collaborative – we forge strong relationships, working together to make a positive impact

· Progressive – we are always looking for new ways to improve and make life better.

A strong performance base – delivering on our plans

Pennon is focused on its sector leading water and wastewater businesses operating in the attractive long-term UK water market. Delivery of South West Water’s 2020-25 (K7) business plan is well underway following the fast start afforded by the award of fast-track status, and we continue to lead the sector with voluntary sharing of outperformance. Driven by a strong performance in totex and financing, we have delivered a RORE of c.8.0% for H1 2020/21, doubling base returns.

· Totex – £34 million efficiency recognised to date, with the momentum of savings in K7 comparable to those in K6, driven by innovative and efficient solutions. One third has been delivered through operating cost efficiency with the remaining two thirds through capital investment saving

· Financing – 2.5% effective interest rate^ is significantly below Ofwat’s 4.2% allowed nominal cost of debt, reflecting locked-in efficiencies

· ODIs – 80% of our ODIs are on track or ahead of target, and we are targeting improvements in all areas.

Pennon Water Services continues to increase its customer base in the highly competitive retail market, winning new contracts through its differentiated customer service proposition. The business is well positioned for the future, through its ongoing focus on targeting a high quality, sustainable customer base, supported by its exceptional service offering and deep customer knowledge.

Dividend policy

The Board has evaluated the Group’s dividend for H1 2020/21 in light of the COVID-19 pandemic and has concluded that it is appropriate for Pennon to continue to deliver on its dividend commitment. The Group has significant cash and liquidity of c.£3.5 billion, has not received any Government support measures and has delivered on its WaterShare+ commitment, sharing £20 million of outperformance with customers. c.60% of Pennon’s shareholders are UK based pension funds, charities, employees, customers and other retail holders who rely on this income. In addition, one in 16 household customers opted to become Pennon shareholders through WaterShare+, marking significant customer ownership for a listed utility and more than tripling the number of Pennon shareholders.

Pennon announced its new sector leading dividend policy at the full year 2019/20 results in June 2020, based on the Continuing Group post the sale of Viridor, with growth of CPIH +2%. The dividend policy is underpinned by our sustainable earnings and growth strategy with expectations for continued outperformance in K7, supporting sustainable dividend growth and cover.

For H1 2020/21 the Board has declared an interim dividend of 6.77p for the Continuing Group. The interim dividend will be paid on 1 April 2021 to shareholders on the register on 29 January 2021. Pennon offers shareholders the opportunity to invest their dividend in a Dividend Reinvestment Plan (DRIP).

Continuing Group

Following the sale of Viridor, the Continuing Group is focused on its water and wastewater businesses of South West Water and Pennon Water Services. The comparatives for the half year ended 30 September 2019 have been restated to show the performance of the Continuing Group in accordance with IFRS 5: Non-current assets held for sale and discontinued operations.

Despite the challenges posed by COVID-19, the performance of the business has been resilient, and the results are in line with management expectations.

The results of the Continuing Group compared to H1 2019/20 reflect:

· Underlying revenue down marginally, from £325.8 million to £319.7 million due to the impact of the K7 revenue reset, a reduction in water usage and other services by non-household customers as a result of the COVID-19 lockdown, partially offset by high household demand and contract wins for Pennon Water Services

· EBITDA lower at £174.5 million from £191.5 million reflecting the K7 revenue reset and the impact of COVID-19, including reduced developer activity during lockdown

· £2.5 million reduction in financing costs arising primarily from lower swap rates through K7

· Profit before tax of £86.7 million (H1 2019/20 £101.4 million)

· £20.5 million non-underlying reduction in revenue reflecting the sharing of our success with customers through the pioneering Watershare+ scheme

· The Group’s principal defined benefit pension scheme will be closed to future accrual resulting in non-underlying charge of £4.3 million

· Continuing Group underlying earnings per share down 10.9% to 17.9p

· Sector leading dividend growth with dividend per share up 2.7% to 6.77p

A full reconciliation of the statutory reported results is included in Item (i) in the Alternative Performance Measures on pages 65 to 68 of this announcement.

Viridor Disposal

· Sale of Viridor completed on 8 July 2020 – £4.2 billion enterprise value

· £3.7 billion net cash proceeds received on completion

· £1.7 billion profit from discontinued operations for the period to 30 September 2020, including gain on disposal of £1,729.3 million and non-underlying cost items of £57.4 million associated with the disposal and subsequent debt retirement costs

· Tax exemption on sale proceeds through Substantial Shareholding Exemption

· Debt right-sizing well progressed with c.£0.75 billion repaid to date of the c.£0.9 billion of debt originally drawn by Pennon to fund Viridor’s investment strategy

· £36.0 million contribution into the Group’s principal pension scheme

· £2.7 billion of available cash resources following the disposal and retirement of certain Group borrowings

· Statutory earnings per share from the combined Continuing Group and discontinued operations of 420.9p resulting from significant gain on disposal of Viridor.

Presentation of results

A presentation of these results hosted by Susan Davy, Chief Executive Officer and Paul Boote, Group Finance Director, will be available on our website www.pennon-group.co.uk/investor-information at 08.00am BST, today 24 November 2020.

We will be hosting a live Q&A session from 09:00am via conference call. Details are included below: