Revenues at Pennon Group rose 10% to £907.8 million in 2023/24, compared to £797.2 million in 2022/23, according to its latest Annual Report and Accounts 2024 released yesterday.

Companies in the Group include South West Water, Bristol Water, SES Water and Pennon Power.

SES Water contributed £35.7 million of the increase – the company has contributed to Pennon’s financial results since its acquisition 10th January 2024. Overall, the Group’s financial performance for 2023/24 is in line with Pennon’s expectations.

Financial year 2023/24 has seen the Group’s largest in-year capex investment to date coupled with the first phase of funding to enable the creation of Pennon Power, a direct subsidiary to Pennon Group plc.

Underlying profit before tax for 2023/24 is up from £16.8 million to £19.3 million before the impact of the acquisition of SES Water, an increase of c.15% compared with 2022/23.

The latest results reflect the merger of South West Water and Bristol Water completed on 1st February 2023 with the combined water business now operating under one licence held by South West Water Ltd.

Within the report, to aid comparability both now and ongoing, the results of South West Water include the operating performance of Bristol Water in both 2023/24 and the comparative period, 2022/23.

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 the increase.

Overall, underlying EBITDA (earnings before interest, taxes, depreciation, and amortization) 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. EBITDA is an alternate measure of profitability to net income which attempts to represent the cash profit generated by the company's operations.

The Group reported a statutory loss before tax of £9.1 million (2022/23: loss of £8.5 million) after net non-underlying costs of £25.9 million (2022/23: £25.3 million).

Group underlying profit before tax is in line with prior year at £16.8 million (2022/23: £16.8 million) with SES Water contributing an underlying loss before tax of £2.5 million. Organically, Group underlying profit before tax increased by £2.5 million to £19.3 million. Pennon said that while this reflects a marginal overall improvement in earnings compared with 2022/23, it represents an overall marked improvement in performance “given the challenging operating conditions, caused by the excessive rainfall during the second half of 2023/24.” Underlying, organic profit before tax in H2 2023/24 was £10.2 million compared to an underlying loss of £5.7m in H2 2022/23.

Pennon - “we think it’s right to reflect on Ofwat’s guidance on dividends”

With regard to dividend payments, Pennon Group said:

“We have carefully considered the final dividend position for 2023/24, considering the new guidance from Ofwat in March 2024. We’ve made an assessment on the performance of the Group in the round, including the performance of the B2B retailers and the development of Pennon Power, and the overall robust performance of our water businesses.

“It’s in this context, we think it’s right to reflect on Ofwat’s guidance on dividends. The final Pennon dividend has therefore been adjusted to reflect the fines linked to a SWW prosecution we had in May 2023, where we were fined £2.4 million, with the ultimate shareholders of the Group, bearing that impact, and not customers. The revised recommended final dividend is 30.33 pence per share.”

South West Water - revenue for 2023/24 was £729.8 million (£673.5 million in 2022/23)

South West Water’s statutory revenue for 2023/24 was £729.8 million compared with £673.5 million in 2022/23. Last year’s revenue included non-underlying reductions of £27.8 million in respect of the second issuance under WaterShare+ (£20.2 million) and the ‘Stop The Drop’ demand reduction incentive (£7.6 million). Underlying revenue of £729.8 million for 2023/24 has increased by 4.1% compared with the prior period (2022/23: £701.3 million). Underlying operating costs of £397.3 million are largely flat year on year with a small increase of £4.4 million (2022/23: £392.9 million). South West Water’s capital expenditure was £582.9 million, an increase of £224.7 million (62.7%) on the prior year (2022/23: £358.2 million).

The final determination, Green Recovery, Defra accelerated delivery, and the RORE reinvestment were weighted towards the end of the AMP7 2020-25 investment period. Enhancement spend has been pulled forward from year 5 to year 4 by c.£80 million due to the investment in water resources and network monitoring. The expenditure is delivering new water treatment works in Bournemouth, a desalination plant in Cornwall, additional reservoirs to improve resilience to drought, and enhanced network monitoring including acoustic loggers and sewer level monitors.

Base expenditure has increased by c.£80 million as a result of spend to mitigate the impact of the weather on assets, and the expansion of the Quality First programme across the regions.

Pennon net debt of £3.8 billion at 31st March 2024

Pennon has raised £1.2 billion of liquidity since March 2023, and completed the successful equity raise of £180 million for the SES Water acquisition.

The Group’s International Financial Reporting Standards (IFRS) net debt at 31st March 2024 was £3,809.2 million (31^st March 2023 £2,965.4 million). The IFRS are a set of accounting rules for how information should be gathered and presented in financial reports.

CEO’s pay increases by 58 per cent to £860,000 in 2023-24

Pennon Group’s Chief Executive Susan Davy base annual salary rose 4 per cent to £511,290 in April this year – up from £492,000 in April 2023. Total fixed pay for the CEO rose from £543,000 in 2022/23 to £562,000 in 2023/24.

However, a £298,000 share bonus under Pennon’s long-term incentive plan (LTIP) deferred reinvestment of shares resulted in an effective overall pay rise of 58 per cent to £860,000 in the 2023-24 year, up from £543,000 the previous year. The long-term performance award must be held for two years and reinvested in Pennon shares.

For 2022/23, the CEO recommended that her bonus and 2020 LTIP award were forgone in full. An equivalent value was diverted into a future issuance under the Company’s WaterShare+ scheme.

The maximum annual award under the LTIP is 150% of base salary.3 year performance period, two-year holding period. As part of Pennon’s 2023 review of the Remuneration Policy, the performance criteria for the LTIP were refined in order to incorporate an element directly linked to Water Quality and the Environment.

Pennon says in the report:

“While the current intention is to maintain a broadly similar structure for the 2024 awards, the detail is yet to be finalised as the Committee is keen to ensure that the targets suitably reflect the objectives for the next regulatory cycle, the acquisition of SES Water and evolving Ofwat guidance. Once finalised, we intend to publish the targets on the Company’s website.”

Commenting on the results, Susan Davey Group CEO said:

“The UK Water sector remains firmly in the spotlight, with regulatory, political and public scrutiny at an all-time high. It’s difficult for any water company to ignore. We are listening...

“We have a clear twin track organic and acquisitive growth strategy. With peak capital investment up nearly two thirds, year on year, this represents our largest ever water programme. That translates in accumulative RCV growth, of 65% and on track to 70% to 2025. This investment delivers asset backed, inflationary returns.

“Our operations in the Group require reliable and efficient power supply and we are investing to increase our renewable energy provision through Pennon Power, with its first EBITDA contribution due in 2024/25, supporting our Net Zero ambitions and targeting to meet 40% of energy requirements of the Group. We are also delivering on our acquisition and consolidation strategy. We are realising the benefits we set out as part of the Bristol Water acquisition, and having acquired SES Water in January, safeguarding their financial resilience through a successful equity raise, we are now fast-tracking through the CMA process, ahead of plan.”

Operational highlights during 2023-24

During the year Pennon unveiled its major new Amplify alliance partners who will deliver South West Water’s major infrastructure plan for 2025-2030, worth £2.8 billion. BAM Nuttall, Clancy, Mott McDonald Bentley, Tilbury Douglas, MWH Treatment and Network Plus Envolve are Amplify’s main construction partners,They will be supported by a range of consultancy organisations: Stantec, Long O’Donnell, and Turner & Townsend will provide project management; Aecom, ChandlersKBS and Turner & Townsend will ensure best value for money; while Aecom, Arcadis, Pell Frischmann, Stantec and WSP will produce innovative designs.

Operational highlights during the year include:

Construction work at Blackpool Pit now complete bringing Pennon’s portfolio of repurposed quarries to four. Blackpool Pit, along with Stannon, Park and Hawks Tor, have all been used this year to support an improvement in water resources in Cornwall.

In Devon, winter pump storage work at Gatherley is also now operational, and along with the Lyd pumping scheme delivered last year, both new schemes have been used this year to support improvement in our water resources in Devon.

The desalination plant in South Cornwall is on track to be operational in 2024/25 and our Porth Rialton water abstraction and treatment scheme will be operational under its winter licence in 2024/25.

Work on building two state of the art treatments works in the Bournemouth area - progressing well at Alderney and Knapp Mill following planning permission being achieved at this site during the year. On track to achieve water into supply at Alderney by March 2025, and customers will then benefit from the enhanced ceramic membrane treatment. In addition, upgrades at four works in Devon and Cornwall are also progressing well with investments made to reduce manganese and install Granular Activated Carbon Treatment.

However, in contrast Bristol Water has not performed well with regard to leakage. In order to make improvements going forward, Pennon said it is focused on enhanced data and monitoring with c.7,000 acoustic monitors installed to support quicker and more accurate detection. In addition, a key mains replacement programme is 60% complete and will support further resilience of the networks.

Pollution incidents remain Pennon’s “most challenging area”

Total wastewater pollution incidents (category 1-3) remains “our most challenging area”, Pennon said. 2023 saw a deterioration in performance following the winter weather in 2023/24, which was the fifth wettest on record with a significant increase in the number of storms and intense periods of rain.

The rain also led to exceptionally high groundwater – according to Pennon, this provides challenging operating conditions and tends to result in less time to respond to issues that arise at treatment works pumping stations, as the issues escalate more rapidly.

“We know there is much more to do and we continue to target a step change in performance”

Key initiatives to deliver continued improvements in pollutions performance include acceleration of additional telemetry on the sewer network (including 12,000 sewer level monitors and deployment of AI technology), continuation of the company’s ‘hotspot’ investment programme at problematic locations and completion of a proactive rising mains replacement programme. Investment in power resilience and increased operational activities such as sewer cleansing and pumping station MOTS are all targeted in 2024.

Investment of c.£145 million by Pennon Power in four projects across the UK

To date, investment of c.£145 million has been announced by newly-created Pennon Power in four projects across the UK, generating up to 135 GWh once operational, along with a two-hour battery system providing 30 MW of storage.

When combined with the smaller scale on-site solar generation roll out, this puts the Group on track to secure c.50% of its energy from renewable sources. The sites acquired by Pennon Power, have the required consents in place and will see construction commence in 2024, with energisation for the full portfolio in financial year 2025/26.

The first site to enter construction is a 45 MWp solar site with co-located battery storage in Dunfermline, acquired in May 2023. With total build costs expected to be c.£60 million, Pennon Power is targeting a split connection with generation expected late in calendar year 2024, with the battery storage unit connecting in Q1 2025. The annual generation from this single asset will be equivalent to the entire current Group renewable energy portfolio.

A further three sites, located in Aberdeenshire, Cumbria and Buckinghamshire, were acquired in July 2023. The sites, with total anticipated build costs of c.£85 million, will add a further 98.5 MWp of generation capacity. The sites in Aberdeenshire and Cumbria are targeted to be operational early in financial year 2025/26, and Buckinghamshire following later in the year.

Pennon Power continues to identify further acquisition targets and anticipates making further investments once the Dunfermline project is fully operational.