TRADING STATEMENT AND BUSINESS PLAN UPDATE

PENNON GROUP PLC

2 October 2023

TRADING STATEMENT AND BUSINESS PLAN UPDATE

Pennon Group announces the following trading update for the six months ended 30 September 2023. Pennon's half year results will be announced on 29 November 2023.

Key Highlights

·      Trading in line with management expectations

·      Water resilience investment delivering demonstrable improvement in the water resource position across the South West - all Temporary Use Bans now lifted

·      On track to deliver significant K7 environmental investment plan with capex of over £400 million for 2023/24

·      Strategically well positioned to continue to deliver a cumulative doubling of RORE base returns over K7 to 2023/24

·      Investment in renewable energy generation progressing in line with expectations - accelerating our Net Zero 2030 commitment

·      Submitted South West Water's ambitious, deliverable and financeable business plan to Ofwat, outlining capital investment of c.£2.8bn[1] over K8 (2025-30) to secure improvements to the benefit of the environment, customers and communities

·      Gearing expectation for K8 remains within our well-established range of 55-65%.

Susan Davy, Group CEO said:

'In our South West Water 2025-30 business plan, we're set to tackle the challenges that matter most in our region head on, with progress already underway. We plan to invest £2.8bn in water quality and resilience, with a pledge to fix storm overflows at beaches and eradicate pollutions, whilst delivering on our Net Zero 2030 promise to the planet. Our robust balance sheet underpins our ambition.

This plan will create 2000 jobs in our communities, alongside our plan for 1000 apprenticeships and graduates. At the same time, we will do more with less, as we drive efficiency and innovation, with a nature first principle, keeping unwelcome bill increases as low as possible.

We have tested our plan with thousands of customers, and they are confident this is the right deal for right now.'

Robust K7 (2025-30) platform 

We continue to build momentum as we plan for the next regulatory period, as demonstrated by South West Water being one of only two companies to improve their position in Ofwat's latest Water Company Performance Report, published in September 2023. Following the completion of the merger with Bristol Water earlier this year, investment in the Bristol Water region is focused on improving the consistency of performance and embedding best practice to provide a sustainable platform across the water business for the next regulatory period.

Water resilience

Climate change has shown how unpredictable weather patterns can be, and the impact they can have on our operations. Whilst the South West region still remains in official drought status, as declared by the Environment Agency in 2022, the impact of our targeted supply and demand side investments has supported the significant improvement in our water resources, and as a result we are pleased to have been able to lift all Temporary Use Bans across Devon and Cornwall. Overall, resource levels for Devon and Cornwall have increased to 64% (compared to 33% this time last year). Roadford Reservoir is now at 54% storage, up over 14 percentage points from this time last year, while Colliford Reservoir is at 52% storage, up 30 percentage points from this time last year.

Our investment plans to further diversify water resources and boost resilience, including the development of Cornwall's first de-salination facility, are ongoing and progressing well.

Delivering on our significant K7 environmental investment programme

Work to deliver on our largest environmental improvement programme to date continues at pace, with total investment for 2023/24 expected to be in excess of c.£400 million.

Our c.£100 million K7 WaterFit investment programme focused on Devon and Cornwall, is now well underway. This programme targets improving river and coastal waters through increasing storm storage, sewer separation and employing nature-based solutions to divert flows. To date, work on over 70 improvement schemes is either complete or underway at 49 bathing beaches.

As the roll out of our WaterFit interventions continue, we expect to see further improvements to performance and remain confident in achieving our 2025 commitments.

Through our pollutions incident reduction plan, established in 2020, we have consolidated the gains made in reducing pollution incidents by c.50% in K7 to date across the network. Dynamic plans are in place to deliver the trajectory of improvements required to achieve our 2024 target.

Strategically well positioned to double base RORE returns

Across our water and wastewater operations, colleagues have worked around the clock to deliver on our commitments to customers, communities and the environment. These efforts are having a positive impact, and as result we anticipate a reduction in the net ODI penalty for 2023/24.

Given the current macro-environment we now anticipate higher regulated capital value (RCV) growth reflecting updated forward assumptions on inflation. Factoring in this, and all midnight adjustments, we anticipate an opening RCV of c.£5.4bn[2] at the beginning of the next regulatory period (2025-30). This c.£200m additional value on our previous guidance would broadly equate to a c.2.5% reduction in gearing, and as we move into K8 we are confident that our gearing will remain within our well-established range of 55-65%.

Whilst finance costs for 2023/24 are reflective of the elevated inflationary and interest rate environment, our agile and efficient financing strategy has ensured we continue to be strategically well positioned in the current macro-environment. In the current regulatory period to 2023/24 we continue to anticipate a cumulative doubling of base returns on regulated equity (RORE), with the structure of our financing portfolio driving significant financial outperformance. 

Financial performance for 2023/24 is expected to be weighted into H2, reflecting lower power costs, and the realisation of further efficiencies as we continue to unlock synergies from the integration of Bristol Water and reshape our organisation for K8.

Investing in renewable generation - Pennon Power

To date we have announced expected investment of c.£145 million at four recently acquired sites across the UK which will deliver c.135 GWh of electricity on an annual basis, with additional battery storage of 60 MW. This investment helps accelerate the Group's Net Zero 2030 target of 50% self-generation, whilst de-risking exposure to volatile global power markets, and offering attractive commercial returns.

Development of these projects is proceeding in line with our expectations, with construction expected to commence during H2 2023/24 at our Dunfermline site, announced in June 2023. Construction at the sites announced in July 2023 is expected to commence over 2024, with the full portfolio of assets on track to contribute to Group earnings in 2025/26.

South West Water's business plan for K8 (2025-30) - The Right Deal for Right Now

South West Water has today submitted its five-year business plan for the period 2025-30 to Ofwat. The £2.8bn package of capital investments outlined are built around addressing four key challenges; storm overflows and pollutions, water quality and water resilience, delivering Net Zero and environmental gains, whilst ensuring bills remain affordable for all. The plan is underpinned by a robust balance sheet with expectations of gearing remaining within our well-established range of 55-65%.

Full details of the Business Plan, along with an investor summary of the plan can be accessed here.

A spotlight presentation on PR24 will be held for investors and analysts at 08:00am on Thursday 5^th October, followed by a live Q&A at 08:45am.

PR24: Spotlight Presentation and Conference Call

Please register here: https://www.pennon-group.co.uk/investor-information

Conference call dial in details:

United Kingdom (Local):                      +44 20 4587 0498
United Kingdom (Toll-Free):                 +44 800 358 1035
Global Dial-In Numbers

Access Code:                                       372707

Cautionary statement in respect of forward-looking statements 

Certain statements in this announcement are forward-looking statements relating to the Group's operations, performance and financial position based on current expectations of, and assumptions and forecasts made by, management. They are subject to a number of risks, uncertainties and other factors that could cause actual results, performance or achievements of the Group to differ materially from any outcomes or results expressed or implied by such forward-looking statements.

The Group's principal risks were described in the 2023 Pennon Group Annual Report which can be viewed online at http://annualreport.pennon-group.co.uk. Such forward looking statements should therefore be construed in light of such risks, uncertainties and other factors and undue reliance should not be placed on them. They are made only as of the date of this announcement and no representation, assurance, guarantee or warranty is given in relation to them including as to their accuracy, completeness, or the basis on which they are made.

No obligation is accepted to publicly revise or update these forward-looking statements or adjust them as a result of new information or for future events or developments, except to the extent legally required. Nothing in this Statement should be construed as a profit forecast.