Pennon Group’s latest trading update published this morning has flagged up its strong investment grade credit rating and the launch of its £2.5 billion Euro Medium Term Note (EMTN) programme in July with an inaugural £400 million public bond issuance.

The trading update covers the period to 26 September 2024, ahead of announcing the half-year results on 27 November 2024.

Pennon Group said it is continuing to drive its previously announced integration and operational transformation programmes. Integration plans for Sutton and East Surrey (SES) Group are on track in June the Group received clearance from the Competition and Markets Authority for Pennon’s acquisition of SES. Phase 1 of SES integration is underway with 10% of efficiency target and identified savings already secured .

Integration of Bristol Water is entering the final phase and on track to deliver the £20 million per annum efficiency savings previously targeted for 2024/25.

As part of a transformation programme across operations, procurement, and customer services, Pennon is progressing its group wide restructuring which will support efficient delivery in AMP8.

During the period Pennon has recognised non-underlying costs for the half year 2024/25 of around £16 million of restructuring costs to support its transformational programmes to reshape the business.

Reshaping and restructuring the business via the transformational programme continues, with a target to achieve around £86 million savings into AMP8.

Following establishment of South West Water’s capital delivery alliance 'amplify' in 2023 extended supply chain partners were confirmed in June. The alliance has already mobilised to deliver the accelerated £75 million of capital expenditure to kick-start the AMP 8 storm overflow programme targeted at 23 beaches, building on existing WaterFit investments.

Operational delivery

The Group has recognised non-underlying costs of c.£16 million for half year 2024/25 related to the Brixham cryptosporidium water quality incident which includes enhanced customer compensation, provision of bottled water over an 8-week period and extensive interventions to clean and filter the network.

The trading update states:

“The cryptosporidium water quality event in Brixham this summer was an incredibly rare event for South West Water and we worked swiftly and diligently to identify the issue, clean the network, and restore full supply to all customers. With support from our colleagues and contractors working 24 hours a day, we delivered a number of interventions including cleaning and flushing the network 27 times, replacing sections of the 30km network, 'ice pigging', and the installation of localised crypto filters and ultra-violet treatment plants on the network.”

Pennon said it is continuing to deliver on its water resilience programme with Blackpool pit in full operation and its new water abstraction and treatment works at Rialton completed in September which will bring total supplemented capacity to 34% for Cornwall - up from 30%. This has improved the water resources position with storage in Cornwall at the highest level in 12 years.

Storm overflows

Pennon said it has continued to see high rainfall with the third wettest October to August since records began with groundwater levels remaining exceptionally high. As a result there has been an increase in the headline number of storm overflow spills - however interventions have removed two thirds of the highest spillers from 2023. With a commitment to focus on beach interventions, Pennon Group have seen a reduction in storm overflow spills during the bathing season, with average spills at one of its lowest levels since 2016.

The Group is continuing to targeting a 2 Star EPA rating for 2024. However, the continued higher than normal rainfall and water table levels in 2024 has impacted the headline number of pollution incidents, alongside the performance of a small number of treatment works.

Supporting customers remains one of four priorities alongside tackling storm overflows, ensuring water resources and water quality, and driving environmental gains, with over 140,000 customers benefiting from affordability initiatives with a 35% increase in customers on social tariffs. In addition to  'Water is Precious' discounted tariffs, the Group is trialling other innovative schemes targeted to reduce consumption.

Financial outlook 2024/25

Looking forward to the full year 2024/25, the trading update says the outlook for South West Water sees a continuation of lower customer demand, offsetting tariff increases and new customer numbers. However, despite continued elevated power costs and the costs of the new digital customer services platform, operating costs in the second half of the year are expected to be lower, benefitting from targeted efficiency savings.

Pennon is anticipating Group capital expenditure for the full year to continue at the H1 2024/25 run rate. This reflects early works in preparation for AMP8, including £75 million of accelerated investment in storm overflows agreed with Ofwat, as well as investment in response to operational incidents such as Exmouth and Brixham, Pennon Power development costs and the full year impact of SES investment.