South West Water owners Pennon Group is planning to use the £3.7 billion net cash proceeds from the sale of waste company Viridor to fund water sector acquisitions, according to its latest trading update.

The update says Pennon believes “there is significant value potential from the reinvestment of the Viridor sale proceeds in the UK water sector and continues to narrow down its review of potential growth opportunities.”

However, shareholders could be in for a significant payout if the Group fails to identify a suitable opportunity. The update says:

“In the event a major value accretive investment opportunity is not available, Pennon expects to make a substantial return of capital to shareholders.”

Pennon, one of the leading water groups in the UK, is on track to deliver resilient financial results in line with management expectations. The update is highlighting “resilient delivery of critical services across the Group during the pandemic” and points out that the financial impact of COVID-19 is in line with expectations

Investment, totex and financing plans all delivering

South West Water is on track to deliver strong totex and financing outperformance – anticipating a doubling of base returns on regulated equity (RORE) of 3.9%.

South West Water's Mayflower Water Treatment Works

The water company’s capital investment programme is delivering improvements with c.80% of Outcome Delivery Incentives (ODIs) either on or ahead of target. In water, the utility is achieving its committed target for supply interruptions two years ahead of plan, and in waste, it is ahead of its target for both internal and external sewer flooding.

South West Water is continuing to target improvements to support the delivery of its most stretching Outcome Delivery Incentives - its targeted pollution incident reduction plan continues to build momentum, delivering significant improvements since its launch in July 2020. The utility is anticipating a net ODI penalty position for 2020/21 based largely on performance in this area.

However, Pennon said it was “encouraged by the impact of the plan to date, and (its) focus remains on ensuring this positive trend continues into 2021/22.”

During the second half of 2020/21 the water company has seen a net increase in demand and associated revenues as increased household demand has more than offset a decline in non-household demand driven by COVID-19 related restrictions. Operational costs have increased in line with these higher levels of demand, according to the update.

Pennon Water Services, the Group’s business to business water retailer, continues to win new contracts.The firm is continuing to focus on growing their high quality, sustainable customer base, with c.£20 million annualised new contract wins during the year partially offsetting reduced demand.

The update says the Group remains in a strong financial position with expected cash and committed facilities well in excess of £3 billion at 31 March 2021.

Sustainable financing

Pennon Group is continuing to raise funds for South West Water through its pioneering Sustainable Financing Framework, with a further £90 million raised in 2020/21, which includes South West Water’s first ever green private placement for £60 million. This brings the total raised since its introduction to more than £900 million.

South West Water’s Green Recovery Initiative could see investment to 2025 increasing by £92 million –a c.10% increase to its existing £1 billion investment programme, with six projects focused on improving public health, protecting the environment, and addressing climate change.

This investment would result in a c.3% RCV increase, supporting a sustainable future for the Group and the creation of up to 500 additional jobs across the region.

Pennon Group has issued the update ahead of its results for the full year ended 31 March 2021, which will be announced on 3 June 2021.