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THIS ANNOUNCEMENT IS FOR INFORMATION PURPOSES ONLY AND IS NOT AN OFFER OF SECURITIES IN ANY JURISDICTION.

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION

10 January 2024

PENNON GROUP PLC ACQUISITION OF SUTTON AND EAST SURREY WATER                                           

Pennon Group plc ("Pennon", the "Group" or the "Company") is pleased to announce that it has today acquired 100% of the issued capital of Sumisho Osaka Gas Water UK Limited ("SOGWUK"), the holding company of Sutton and East Surrey Water plc ("SES Water") and certain other ancillary businesses, for £89 million from Sumitomo Corporation and Osaka Gas, with a total enterprise value of £380 million (the "Acquisition").

Pennon is also announcing its intention to issue new Ordinary Shares to raise up to £180 million (the "Equity Capital Raise") in connection with the Acquisition, in order to ensure that the pro forma leverage and capital structure for the enlarged Group following the Acquisition remains consistent with Pennon's well-established water business gearing range of 55-65%⁽¹⁾.

Key Investment Highlights

·    Acquisition of SES Water and other ancillary businesses, adding a high-quality business with over 750,000 customers and a forecast shadow Regulatory Capital Value ("RCV") of £351⁽²⁾ million as of 31 March 2024

·    Purchase price of £89 million for the equity, including repayment to the vendors of £14 million of equity invested into SOGWUK since 31 March 2023

·    Enterprise value of £380 million based on net debt of £291⁽³⁾ million (as of 31 March 2023)

·    Enterprise value equates to a premium to SES Water 2023 RCV of c.6% (after certain adjustments)⁽⁴⁾. The transaction is expected to increase the Group's RCV by c.7% on Acquisition

·    SES Water's 2025-2030 regulatory period ("K8") RCV is forecast to grow at an attractive average annual rate of c.5%⁽⁵⁾

·    Builds on Pennon's existing water operations by acquiring another high-quality, water-only business, along with access to an experienced and talented management team, and follows the successful previous acquisitions of two water-only companies

·    Acquisition will benefit SES Water's customers and other stakeholders - SES Water's customers will be offered the opportunity to participate in Pennon's unique WaterShare+ customer shareholding scheme

·    Expected to be earnings accretive from the first year of full ownership (2024/25), and to generate attractive returns whilst supporting further RCV growth in the 2020-2025 regulatory period ("K7"), bringing total expected growth over K7 for Pennon to 71%

·    Complementary ethos focused on customer affordability and delivering better outcomes for customers and the environment with SES Water's digital capabilities and smart technologies complementing Pennon's current offering

·    Consistent with Pennon's successful track record of value creation through the realisation of synergies, a run rate of £11⁽⁶⁾ million per annum is anticipated, enabling enhanced shareholder returns, driven by operational efficiency initiatives, lower financing costs and economies of scale

Commenting on the Acquisition, Susan Davy, Group Chief Executive said:

"SES Water is a fantastic fit for Pennon as we further expand our presence in water supply across Southern England, building on our successful similar acquisitions of Bournemouth Water and Bristol Water alongside the adoption of water supply in the Isles of Scilly.

The business is a proven, high-quality water operation. We are particularly impressed by the innovation and technology-led solutions implemented by SES Water.

As part of the Pennon Group, we will enhance SES Water's financial resilience and better position the business to serve its customers and all stakeholders, as has proven to be the case with our acquisitions of Bournemouth Water and Bristol Water.

We are able to invest in SES Water's resources infrastructure, environment and people thanks to our strong financial performance and long-term UK shareholder base, delivering a seamless transition for SES Water's customers while also providing a more robust and reliable service in the medium term.

We expect SES customers to benefit from Pennon's stewardship of the business, including being able to offer them the opportunity to participate in our unique WaterShare+ scheme and participate in the ownership of their local water provider."

Financing and Expected Timetable

·    Completion of the Acquisition, which is not subject to any conditions, has already occurred

·    The Acquisition will now be subject to review by the Competition and Markets Authority ("CMA"), with input from the Water Services Regulation Authority ("Ofwat"). Pennon considers that the Acquisition will create a net benefit for customers and shareholders and expects to receive a decision from the CMA within its usual timescales

·    The Acquisition is being financed from existing cash and financial resources

·    There is not expected to be any funding impact on South West Water's plans to otherwise deliver a compelling AMP8 investment plan

·    The proceeds from the Equity Capital Raise will be used in connection with the Acquisition to ensure that the enlarged Pennon Group remains within our well-established water business gearing range of 55-65%⁽¹⁾ following completion

·    Further information on the Equity Capital Raise and the use of proceeds from it can be found in the separate announcement being released by Pennon today

Webcast and Conference Call

A webcast for investors and analysts will take place today at 8.00am (GMT) by Susan Davy, Group Chief Executive and Steve Buck, Group Chief Financial Officer, immediately followed by a live Q&A.

The webcast can be accessed here: Investor Information | Pennon Group PLC (pennon-group.co.uk)

The presentation can be accessed here: https://www.pennon-group.co.uk/investor-information/financial-reports-and-presentations

The conference call can be accessed using the details below.

United Kingdom (Toll-Free):      +44 800 358 1035

United Kingdom (Local):              +44 20 3936 2999

Global Dial-In Numbers

Conference passcode:   956400

For further information, please contact:

Pennon Group PLC                                                                                                          

Steve Buck                          Group Chief Financial Officer                                                   +44 (0)1392 44 3168

Jennifer Cooke                   Group Head of Investor Relations

Media Enquiries

James Murgatroyd            FGS Global                                                                                   +44 (0)207 251 3801

Harry Worthington

Barclays Bank PLC

Lead Financial Adviser and Joint Corporate Broker                                                          +44 (0) 20 7623 2323

Alisdair Gayne, Iain Smedley, Osman Akkaya, Richard Bassingthwaighte

Morgan Stanley & Co. International plc

Joint Financial Adviser and Joint Corporate Broker                                                         +44 (0) 20 7425 8000

Andrew Foster, Francesco Puletti, George Chalaris, Josh Williams

Background to and rationale for the Acquisition

The Acquisition of SES Water marks an important step for the Group as it looks ahead to the K8 (2025-30) regulatory period. The Board considers SES Water to be highly complementary, adding a high-quality, water-only operation to the Group. Building on Pennon's track-record of acquisitive growth and value creation evidenced through the acquisition and integration of Bournemouth Water and Bristol Water, the addition of SES Water further increases the water element of RCV to represent c.57% of the Group's total RCV⁽⁷⁾.

The Acquisition of SES Water represents a strong strategic fit for the Group and has been assessed in line with the Board's highly disciplined review of potential growth opportunities, conforming with our twin-track growth strategy. In reviewing the Acquisition, the Board considered a range of factors including earnings accretion, value creation from the impact on shareholder returns and the impact on customers and other stakeholders.

The Board believes that the Acquisition presents an attractive opportunity to further expand South West Water's wholesale capabilities, whilst also deploying best practice from both businesses to deliver value for customers, shareholders and wider stakeholders.

In addition, Pennon represents a stable, well-financed and long-term custodian of SES Water that will enhance SES Water's financial resilience and is able to invest in SES Water's water resources infrastructure, environment and people owing to Pennon's strong financial performance and long-term UK shareholder base.

Furthermore, Pennon's ownership and approach to the local delivery of local services will give SES Water customers greater advocacy, involvement and ownership in their water provider with Pennon's unique share issuance scheme WaterShare+, providing SES Water customers with the opportunity to become shareholders in their local water company.

The Acquisition will increase the size and scale of the Group to serve a total population of c.4.3 million and will deliver an estimated c.7% increase in RCV on acquisition, bringing total expected RCV growth for Pennon to 71% over K7. It also adds another 476 dedicated employees to the Group, enabling access to a new, wider and diverse talent pool in Southern England.

Completion of the Acquisition, which is not subject to any conditions, has already occurred. Following completion, the Acquisition will now be subject to review by the CMA, with input from Ofwat.

SES Water and the other ancillary businesses which make up the Acquisition will be managed separately from the rest of the Pennon Group until the CMA review is complete.

Under the terms of the Acquisition, Pennon is making a total aggregate cash payment of £89 million to Sumitomo Corporation and Osaka Gas for 100% of the issued share capital of SOGWUK, which includes £14 million to reimburse equity contributions they have made to SOGWUK since 31 March 2023.

The size of the Acquisition means that it represents a Class 2 transaction for the purposes of the UK Financial Conduct Authority's Listing Rules.

About Pennon

Pennon Group plc is a FTSE 250 listed UK focused environmental infrastructure group, comprising South West Water (incorporating Bristol Water and Bournemouth Water), Pennon Water Services, Pennon Power, a stake in Water2business and now including SES Water and a number of other ancillary businesses which make up the Acquisition.

South West Water is one of the leading businesses in the UK water sector, providing water and wastewater services to a population of c.3.5 million across nine counties in the South West.   

The Company provides over 870 million litres of safe, clean drinking water every day, in addition to the management of c.23,000km of sewer network used to transfer water and surface water run-off to one of our 653 wastewater treatment works where it is treated, tested and safely returned to the environment.

Following the Acquisition, the Group anticipates RCV growth over the K7 (2020-25) period of 71%, resulting in an RCV of £5.8 billion by 2025. Looking to the K8 (2025-30) period, we expect RCV growth of c.37% including the Acquisition, bringing total expected RCV growth 2020-2030 to c.134%.

Pennon Water Services is an 80:20 venture with South Staffordshire Plc, and provides retail water and wastewater and value-added services to around 160,000 non-household customer accounts across England and Scotland, and is focused on delivering long-term, sustainable growth.  Water2business is a 30:70 venture with Wessex Water, providing retail water and wastewater services to over 180,000 non-household accounts across England and Scotland.

Further information on Pennon can also be found on the Group's website, www.pennon-group.co.uk

Pennon LEI: 213800V1CCTS41GWH423

About SOGWUK and SES Water

SOGWUK

SOGWUK is the holding company for SES Water and certain other ancillary businesses including SES Home Services, SES Business Water, Allmat Limited, Advanced Minerals Limited and Surrey Downs Property Investments Limited, however these are very small in size in the context of SES Water.

SOGWUK had adjusted net debt of £291⁽³⁾ million as of 31 March 2023.

SOGWUK had gross assets of £613 million as at 31 March 2023 and profit before tax of (£31 million) for the period 31 March 2022 to 31 March 2023.

SES Water

SES Water is a local water supplier company in South East of England with over 150 years of operating history in the abstraction, treatment, storage and distribution of clean potable water to household customers and businesses.

Serving over 750,000 customers, its designated geographical coverage, includes neighbourhoods of East Surrey, West Sussex, West Kent and South London.

Purpose led, SES Water's aim is to harness the potential of water to enhance nature and improve lives. It aims to achieve this by placing customers and the environment at the heart of its decision making and driving transformation through digital innovation as an industry leader in smart networks.

SES Water is one of the best performing water companies across a range of indicators including:

·    Reliability of service - a top performer on supply interruptions in 2023

·    Reducing leakage - targeted reduction plan on track

·    Water quality - upper quartile performance in the sector

SES Water had an RCV of £334 million as of 31 March 2023 and an RCV of £351 million estimated as of 31 March 2024⁽²⁾.

Important notices

The person responsible for arranging the release of this announcement on behalf of the Company is Andrew Garard, Group General Counsel and Company Secretary.

This announcement is being issued by and is the sole responsibility of the Company. This announcement is for information only and does not itself constitute, contain or form part of an offer to sell or issue or the solicitation of an offer to buy or subscribe for securities referred to herein in any jurisdiction including, without limitation, the United States, any other Restricted Territory (as defined below) or in any jurisdiction where such offer or solicitation is unlawful. No public offering of securities will be made in connection with any securities referred to herein in the United Kingdom, the United States, any other Restricted Territory or elsewhere.

This announcement is restricted and is not for publication, release, distribution or forwarding, in whole or in part, directly or indirectly, in or into the United States of America (including its territories and possessions, any state of the United States, Australia, Canada, the Republic of South Africa, Japan (each a "Restricted Territory") or any other jurisdiction in which such release, publication, distribution or forwarding would be unlawful. No public offering of the securities referred to herein is being made in any such jurisdiction or elsewhere. This information has not been approved by the London Stock Exchange, nor is it intended to be so approved.

The securities referred to herein have not been and will not be registered under the United States Securities Act of 1933, as amended (the "Securities Act"), or with any securities regulatory authority of any state or other jurisdiction of the United States, and may not be offered, sold or transferred directly or indirectly in or into the United States, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and in compliance with the securities laws of any state or any other jurisdiction of the United States. No public offering of any securities referred to herein is being made in the United States.

No offering document or prospectus will be made available in any jurisdiction in connection with the matters contained or referred to in this announcement and no such offering document or prospectus is required (in accordance with the EU Prospectus Regulation or UK Prospectus Regulation) to be published.

Persons (including, without limitation, nominees and trustees) who have a contractual or other legal obligation to forward a copy of this announcement should seek appropriate advice before taking any action.

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. Often, but not always, forward-looking statements can be identified by the use of forward-looking words such as "plans", "expects", "is expected", "is subject to", "budget", "scheduled", "estimates", "forecasts", "goals", "intends", "anticipates", "believes", "targets", "aims" or "projects". Words or terms of similar substance or the negative thereof, are forward-looking statements, as well as variations of such words and phrases or statements that certain actions, events or results "may", "could", "should", "would", "might" or "will" be taken, occur or be achieved. Such statements are qualified in their entirety by the inherent risks and uncertainties surrounding future expectations.

Forward-looking statements include statements relating to: (a) future capital expenditures, expenses, revenues, earnings, economic performance, indebtedness, financial condition, dividend policy, losses and future prospects; (b) business and management strategies and the expansion and growth of the Company's operations; and (c) the effects of global economic conditions on the Company's business.

Such forward-looking statements involve known and unknown risks and uncertainties that could significantly affect expected results and are based on certain key assumptions. Many factors may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Important factors that could cause actual results, performance or achievements of the Company to differ materially from the expectations of the Company, include, among other things, general business and economic conditions globally, industry trends, competition, changes in government and changes in regulation and policy, including in relation to the environment, health and safety and taxation, labour relations and work stoppages, interest rates and currency fluctuations, changes in its business strategy, political and economic uncertainty and other factors. Such forward-looking statements should therefore be construed in light of such factors.

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.

Neither the Company nor any of its directors, officers, employees or advisers provides any representation, assurance or guarantee that the occurrence of the events expressed or implied in any forward-looking statements in this announcement will actually occur. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as at the date of this announcement.

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 announcement should be construed as a profit forecast or profit estimate.

Neither the content of the Company's website (or any other website) nor the content of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into or forms part of this announcement.

Barclays Bank PLC ("Barclays"), which is authorised in the United Kingdom by the Prudential Regulation Authority and regulated in the United Kingdom by the Prudential Regulation Authority and the Financial Conduct Authority, is acting exclusively as lead financial adviser and joint corporate broker to the Company and no one else in connection with the Acquisition. In connection with such matters, Barclays, its affiliates and their respective directors, officers, employees and agents will not regard any other person as their client, nor will they be responsible to anyone other than the Company for providing the protections afforded to clients of Barclays nor for providing advice in connection with the Acquisition, the contents of this announcement or any matter referred to herein.

Morgan Stanley & Co. International plc ("Morgan Stanley"), which is authorised in the United Kingdom by the Prudential Regulation Authority and regulated in the United Kingdom by the Prudential Regulation Authority and the Financial Conduct Authority, is acting exclusively as joint financial adviser and joint corporate broker to the Company and no one else in connection with the Acquisition. In connection with such matters, Morgan Stanley, its affiliates and their respective directors, officers, employees and agents will not regard any other person as their client, nor will they be responsible to anyone other than the Company for providing the protections afforded to clients of Morgan Stanley nor for providing advice in connection with the Acquisition, the contents of this announcement or any matter referred to herein.

Note: All £m and % numbers shown to 0 decimal places. Potential differences due to rounding.

⁽¹⁾ Gearing at the regulated water business level, defined as net debt / RCV

⁽²⁾ Based on management forecast of RCV as at 31 March 2024

⁽³⁾ Reported net debt adjusted to include unamortised issuance costs and short term debt, before fair value uplift, rounded down from actual figure of £291.52m

⁽⁴⁾ Premium stated before £14 million of vendor equity contributions since 31 March 2023 and reflects adjustments including pensions and Pennon's view on the value of unregulated assets

⁽⁵⁾ K8 total nominal growth rate of 25%, based on SES Draft Business Plan for AMP8  

⁽⁶⁾ Anticipated run rate of targeted efficiency savings (on a net basis)

⁽⁷⁾ March 2023 Ofwat numbers