Pennon LON:PNN, the FTSE250-listed water infrastructure company headquartered in Exeter published its half-year results to the end of September.
The company saw revenue rise 9.35% from GBP389.3m to GBP425.5m when compared to the same period in 2021, primarily due to growth in non-household demand and a full six-month contribution from recently acquired Bristol Water. However little of this translated into profit, which fell 73.8% to GBP20.9m, compared to GBP79.9m. Adjusted earning per share also fell period-to-period by 74.2% to 7p. Despite this, Pennon announced an interim dividend of 12.96p, up 10.8% from last year.
Pennon had to absorb GBP1.6m of costs incurred in connection with the acquisition and integration of Bristol Water during the period and paid GBP2.4m in tax. Pennon owns South West Water and serves around 1.7 million customers in Devon, Cornwall, Dorset and Somerset and was created after the privatisation of the water industry in 1989
Pennon power costs
In a statement published this morning, Pennon said its power costs jumped to around GBP49m, up from GBP24m a year ago. Profits fell, said the company in the statement, because of near-term pressures on earnings from inflation-driven power pricing and financing costs. Management had previously highlighted the issue of power costs, saying it fully-expects full-year power costs to rise to around GBP106m, up from GBP56m the previous year.
Susan Davy, group chief executive said in the statement: “In the first half of this year we’ve delivered record levels of investment to support a step change in environmental performance and build resilience for the longer term, having experienced the hottest, driest year since records began. Today we are announcing a further increase in investment in water resilience schemes of GBP45m to repurpose ex-quarries and mines and introduce de-salination units to ensure our resilience to 2050 is in place now. Together with the investment announced earlier this month, this brings the total reinvestment in these initiatives to GBP75m. Underpinning our investment is our sector-leading financial outperformance and strong balance sheet.”
Sewage spills
That said, Pennon’s environmental performance has been under the spotlight this year when South West Water saw Ofwat, the industry regulator, open an enforcement case in June over poor wastewater and sewage treatment, suggesting it was not complying with its legal obligations. This was additional to Ofwat’s industry-wide investigation and South West Water was cited as the second-worst water company in the country for dry spills, reporting 21 dry spills between 31st May and 30th September. Alongside the Ofwat investigation, the Environment Agency is involved in a criminal investigation into potentially illegal sewage discharging by water companies.
Sewage spills are intended to occur only during times of exceptional rainfall to help the sewage network cope, with releases at other times – ‘dry spills’ – a potential breach of water firms’ permits. There was very little rain between May and October this year. Amy Slack, head of campaigns and policy for Surfers Against Sewage, a pressure group, said: “Over the last year, the UK public has made clear their disgust at what’s happening to our rivers and seas, and yet water companies continue to pollute at will. It’s especially alarming to uncover evidence of potentially illegal activity by water companies in the form of ‘dry spills’, which are not permitted under current regulations. Shareholders and CEOs are unashamedly profiteering off pollution.”
The Department for Environment Food and Rural Affairs said in a statement recently: “Our storm overflows discharge reduction plan has brought in strict targets on sewage pollution and will require water companies to deliver the largest infrastructure programme in their history to tackle storm sewage discharges – a GBP56bn capital investment over 25-years. We have been clear that water companies cannot profit from environmental damage. Through increased monitoring and transparency, driven by government, the regulators have launched the largest criminal and civil investigations into water company sewage treatment works ever.”
Pennon said in its statement: “[The company is] on track to reduce our impact on river water quality by one third by 2025 – extensive enhancement across the network including sewer separation at nine sites and progressing our bathing water pilots on the rivers Dart and Tavy.”
The company also claimed: “Our Pollution Incident Reduction Plan continues to deliver results and we are on track to deliver our best ever performance this year, driven by the acceleration of initiatives from the plan to deliver maximum environmental benefit.”
Pennon’s overhanging debt
One of the most-significant drags on performance was Pennon’s overhanging debt, which increased 13% from the prior year, to GBP2.9bn. As inflation has risen, so have interest rates and Pennon found itself paying GBP37m more on non-cash interest charges than in 2021. And just like a burst water main, Pennon haemorrhaged cash in the period with free cash flow outflow of GBP41.1m for the half-year, compared to an outflow of GBP24.9m last year.Pennon said it has; “…a relatively lower level of index-linked debt compared to the industry average allows us to outperform the cost of debt allowances” …and… “Our efficient financing strategy continues to drive significant outperformance with South West Water’s effective interest rate at 5.1% [compared to 3.4% for the year previously]. Bristol Water’s level of index-linked debt is in line with the industry average at around 50%, resulting in an effective interest rate of 10%.”
The company warned that its second half would likely be worse than 1H22. Pennon opened trading today (30th November) at 939p, fell t0 856p in the first few hours of trading and was at 922.5p by lunchtime. The company has offered a year-to-date return of -21.4% and a one-year return of -25.1% with shares ranging between 735.00p and 1,246p over a 52-week period. The company has a market cap of GBP2.5bn.
