Pennon Group plc has upped its dividend payment to shareholders by 3.8% to £127 million and reported a £166.3 million underlying operating profit( up 8.6% from £153.1 million in 2022/23) in its full year results for 2023/24.

On Tuesday, Pennon reported a total dividend payment to shareholders for the year of 44.37 pence. The Group paid an interim dividend of 14.04 pence per share on 5th April 2024.

Commenting on its final dividend, Pennon said:

“We have carefully evaluated the recommended final dividend position considering performance in the round for the group, growth in our business to business retailers, development of Pennon power and for the water businesses we have considered Ofwat's recent guidance in this area.

“The final recommended Pennon dividend has therefore been adjusted to reflect a £2.4m fine linked to a South West Water prosecution we had in May 2023, where we believe the ultimate shareholders of the Group, should bear that impact, and not customers.

“As such the revised final dividend recommended is 30.33 pence per share.”

Pennon's results showed pre-tax losses of £9.1 million for the year to 31 March, against losses of £8.5 million the previous year. On an underlying basis, pre-tax profits remained flat at £16.8 million while underlying operating profit (excl. SES water) up c.9%.

This week has seen Pennon’s South West Water come up for widespread criticism following the detection of cryptosporidium in the Hillhead area of its local water network which resulted in around 16,000 households and businesses becoming subject to a boil water notice.

Susan Davy, Group Chief Executive Officer, commented:

"Whilst the results we are announcing today are based on our performance for the last financial year, we are 100% focused on returning a safe water supply to the people and businesses in and around Brixham. Normal service has returned for 85% of customers, but we won't stop until the local drinking water is returned to the quality all our customers expect and deserve. Our absolute priority continues to be the health and safety of our customers and our operational teams are working tirelessly around the clock to deliver this.

"We have delivered a robust performance for 2023/24 and retained good levels of liquidity. We have continued to make sure we are prepared for a sustainable future for all our stakeholders with a record level of investment, record support for customers and the creation of new jobs.

"At a time when media, public and regulatory scrutiny is high, it is important we do what is right for all. In the context of the wider group performance, we have carefully considered Ofwat's new dividend guidance for water businesses. We have followed our K7 dividend growth policy of CPIH + 2%, and adjusted the final dividend quantum by £2.4 million, equivalent to the South West Water Court fine in 2023/24, signaling we are listening, clearing the way for long-term shareholder value."

Key operational points highlighted by Pennon Group include:

• Broken the drought cycle for Devon and Cornwall - 100% peak reservoir capacity achieved
• Exceptional rainfall driving headline increases in storm overflow and pollutions
• Sector-leading internal sewer flooding performance
• 100% bathing water quality for third consecutive year
• Peak investment of £583 million in water business
• £145 million commitment to renewable energy providing 40% of group energy requirements
• Below inflation bill increases for two years - bills lower today than they were 10 years ago
• Over £100 million customer support enabled in AMP7 to date

Energy generation

Commenting on its energy requirements, Pennon said it is investing to increase renewable energy provision through Pennon Power, with its first contribution due in 2024/25, supporting Net Zero ambitions and meeting 40% of the energy requirements of the Group. Total power costs in 2023/24 were £110 million (wholesale costs £73 million, non-commodity costs £37 million).

The wholly owned subsidiary to Pennon Group plc has acquired the rights to build four solar farms, one of which includes a co-located battery storage asset in the UK.

Specifically, these investments include:

• A co-located solar (45 MWp) and battery storage (60 MWh) site in Fife, acquired in May 2023. This is a ready to build site, with consents in place, with total build costs expected to be c.£60 million. Solar generation is expected to be c.39 GWh commencing at the end of next financial year 2024/25.
• A further three sites, located in Aberdeenshire, Cumbria and Buckinghamshire, acquired in July 2023. These sites, with total anticipated build costs of c.£85 million, are expected to provide a further 98.5MWp of generation capacity, generating c.96 GWh and are targeted to be operational during 2025 and first half of 2026.
• Of this overall commitment, Pennon has incurred total costs of c.£59 million for the acquisition of the sites and construction costs to date on the first project at Fife. This is expected to commence energy generation late in financial year 2024/25. Aberdeenshire and Cumbria sites will enter construction during late summer 2024 and Buckinghamshire in 2025. The financial contribution will accelerate in financial year 2025/26 and all four sites will generate income during 2026/27.

Pennon Power will continue to identify further opportunities to enable further growth in renewable generation at existing sites and by optimising the projects that have already been acquired. The generating capacity of the investments to date equates to around c.40% of electricity usage and will contribute significantly towards a target of 50% self-generation.

Delivering on acquisition and consolidation strategy

Pennon said it is also delivering on its acquisition and consolidation strategy, including:

• realising benefits set out as part of the Bristol Water acquisition with c.£17 million of annualised synergies identified to date
• on track to meet the £20 million targeted by 2024/25, in addition to the c.£18 million financing benefits already realised.

Commenting on its acquisition of SES Water in January, Pennon added that it had safeguarded the company’s financial resilience through a successful £180 million equity raise and was now fast-tracking through the CMA process. Pennon is anticipating annualised synergies of c.£11 million into AMP8 from the SES acquisition.

"This is a year in which the weather has been both our friend and our foe"

With average rainfall increasing by 50% when compared to long term averages, the company has had the 5th wettest year on record for Devon and Cornwall, enabling Pennon to achieve 100% strategic reservoir capacity for Devon and Cornwall during the year ahead of target via:

• opening two reservoirs at Blackpool Pit and Hawks Tor
• increased treatment capacity at Rialton, alongside other pump recharge schemes
• on track to deliver a 2-phase desalination scheme for Cornwall.

However, as a result of the weather, significantly increased wastewater flows have impacted headline performance for wastewater pollutions and the use of storm overflows. To tackle the c.20% increase in flows seen in 2023, Pennon said it is focused on reducing the amount of water that enters its sewers through infiltration reduction and sewer separation projects. In addition it has redoubled efforts at both its treatment works and pumping stations, where the higher levels of flows have driven spikes in performance.

By reinvigorating action plans, treatment works performance has recovered from the degradation seen last year, stabilising performance into 2024, with a combination of inlet and storm tank cleansing and risk-based generator servicing, site-based compliance, reedbed surveys and refurbishments. Pennon has now turned its efforts to the 1,250 pumping stations, with improved site MOTS and enhanced cleansing as well as tackling power resilience.

Solid building blocks in place

Solid building blocks Pennon Group is putting in place include:

• Bolstering delivery of the wider supply chain, under an alliance collectively known as Amplify, with a two-tier supplier model already in place and mobilised, delivering 1,000 projects in support of our £2.8bn investment in the region.
• Leveraging technology, trialing AI in customer services and using predictive modelling to support wastewater operations.

Robust financial position

Pennon is also flagging up its robust financial position with solid financial performance, saying it is “well positioned for the next regulatory period.”

The Group also has new and renewed facilities which have raised £1.2 billion of liquidity since March 2023, together with the successful equity raise of £180 million for the SES acquisition. Its water group gearing at 63.5% is in line with the water business AMP7 policy.

The Group's statutory revenue for 2023/24 was £907.8 million compared with £797.2 million in 2022/23 which included non-underlying reductions of £27.8 million in respect of the second issuance under WaterShare+ (£20.2 million) and its 'Stop The Drop' demand reduction incentive (£7.6 million). Group underlying revenue increased by £82.8 million, or 10.0%, to £907.8 million, with SES Water contributing £35.7 million of the increase.

Organically, underlying revenue has increased by £47.1 million (5.7%) with South West Water's revenue increased by £28.5 million with inflationary tariff increases being offset by ODI penalties and prior year over recovery of revenue. Pennon Water Services' revenue increased by £15.8 million to £233.8 million, with new contracts, predominantly outside South West Water's regions, contributing c.£9 million to this increase.

Overall, underlying EBITDA has increased 9.9% from £307.8 million to £338.3 million with South West Water and Pennon Water Services contributing £332.5 million and £7.4 million, respectively, of this overall increase. SES Water contributed £3.6 million to the overall increase.

Capital expenditure has resulted in an increase in capital investment cash outflows of £267.6 million to £598.1 million (2022/23: £330.5 million). This included c.£49 million of cash outlay from the total £59 million investment recognised in Pennon Power.